Why Strategic Venture Capital is Thriving in a Founder's Market Let's take a closer look at why strategic capital is thriving in today's venture environment, how startups can benefit from strategic capital, and how corporate executives investing in startups can make their organizations more innovative.
By Anis Uzzaman Edited by Joseph Shults
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We've seen that 2021 is a record-setting year for investment in VC-funded startups and private companies. This vast global liquidity has caught the eyes of non-traditional investors including sovereign wealth funds and limited partners, both of whom are looking to boost returns with direct investments. This makes it a buyer's market for startups, and the best entrepreneurs have access to what seems like unlimited capital.
Let's take a closer look at why strategic capital is thriving in today's venture environment, how startups can benefit from strategic capital and how corporate executives investing in startups can make their organizations more innovative.
Related: What Every Investor Should Know Going Into 2022
Record-setting investments
2021 has proven to be a good year for entrepreneurs and investors alike. We're seeing record-setting investment levels with many deals across the world, spanning a variety of technology sectors. Activity seems to be robust at all stages of investment, with significant activity by traditional VCs and corporate investors – not to mention by mutual funds, private equity, and hedge funds. Startups and investors are benefiting from a robust IPO and M&A market.
The Pitchbook NVCA Venture Monitor report highlights the VC industry as being resilient and a major contributor to the country's economic recovery. The U.S. public market is healthier than ever. A robust third-quarter consisting of 3,518 deals has resulted in $238.7 billion invested year-to-date. The report states that VC-based public listings have generated $513.6 billion in exit value; in fact, VC-backed IPOs accounted for more than two-thirds of the total U.S. listing year-to-date – emphasizing the importance of venture capital to our economy.
Why strategic capital is thriving
More so than ever, it's smart for startups to fundraise by seeking out strategic capital, including corporate venture capital. One increasingly popular investment model – known as venture capital-as-a-service – is used by Pegasus Tech Ventures. This model allows corporations to outsource their startup investing by partnering with an experienced VC firm.
By connecting startups with corporations, the startups obtain financial capital, and equally important they obtain access to an experienced network of corporate executives. These investors have the knowledge and experience to help startups expand their business intelligently. Corporate investors – who sometimes have avoided early-stage investments in the past – now invest across a range of stages. Investing allows them to bring technological innovation into their corporations; such innovation is difficult to create or find without a VC partner.
Related: 5 Ways This Crisis Is Changing Venture Capital Investment Strategy
How investors are adding value
Given recent market hype and the influx of investors, we advise entrepreneurs to be selective and investors to do careful due diligence. Investors should strive to set themselves apart and add value to the startups in which they invest. This means assisting startups in staffing, positioning, decision-making, and launching products or services. Investors – including those using the venture capital-as-a-service model – should offer their knowledge and experience to benefit the startups in which they've invested.
Corporate investors have strong experience, so they're in the perfect position to advise startups at every stage of their journey. Offering advice and sharing connections help entrepreneurs avoid the mistakes that startups often make. At Pegasus, since we manage investments on behalf of corporations, we make a point to schedule regular meetings with our corporate partners, typically with the CEO's office or the office of innovation. Understanding their vision and interest areas helps us find the right type of startups for investment.
Investment across a range of sectors
We've seen a wide range of sectors attract investment in 2021. This includes life sciences, wellness, space exploration, quantum computing, artificial intelligence, the metaverse, food technology, agricultural technology, and entertainment. According to the Pitchbook NVCA report, software performed especially well with 156 exits during Q3 2021, just slightly lower than Q1 (163 exits) and Q2 (171 exits).
As global concern about climate change becomes more serious, we've seen startups and investors place more focus on hydrogen fuel cell technology, battery technology for electric transportation, climate tech and cleantech. Climate tech is typically defined as technology that addresses climate change and mitigates the impacts of global greenhouse gas emissions. Cleantech refers to technology that increases the performance or efficiency of production while minimizing negative impacts to the environment.
Related: Why Now Is the Time to Invest in Climate Technology
The impact of SPACs
The main attraction of SPACs – Special Purpose Acquisition Companies – is that they avoid many of the costs and complications of the traditional IPO and listing processes. They can reduce the time and costs of acquisitions and bringing private companies public. Although SPACs have been around since the early 2000s, they've had a growing impact during Q3 2021.
Pitchbook and NVCA report that 413 SPAC vehicles raised $109.4 billion through Q3 2021, and mergers continue to occur. However, the report indicates a broad sell-off since February 2021, which, combined with SPAC underperformance, raises doubt about how well these vehicles will do in the long run as an alternative to IPOs. Recent actions by the U.S. Securities and Exchange Commission are likely to have a chilling effect on SPACs, so we don't necessarily expect their role in the market to continue growing.
What's ahead?
Now's the time for entrepreneurs and investors to ride the wave of prosperity. We've seen $96 billion raised by VCs over the past nine months, and there's no clear sign of a slowdown. We recommend that startup founders think carefully about how much investment they need and from what type of investors. Despite the robust market, it's always critical to refine your company's positioning, thinking carefully about your unique value proposition and how your product or service benefits customers. Doing so helps ensure success for both startups and investors.
