How Venture Capital has Changed in the Last 10 Years
Venture capital is no longer the realm of dusty investment bankers and old-school investors. Over the last decade, it has been reinvented to become a vibrant industry where enterprises can access much needed capital to grow their business. As venture capitalists continue directing more funds into startups than ever before, they are also creating new trends and expectations for companies seeking investments. These developments offer insight into how far VC has come since its humble beginnings as an obscure corner of finance investing exclusively in early-stage companies.
In this article, we’ll explore some of the notable changes that have occurred in venture capital over the last 10 years and what they mean for businesses looking to secure funding now and in the future.
The Proportion of Seed Funding has Increased in the Last 10 Years
Venture Capital investment in early-stage startups has seen a huge increase in recent years, far surpassing the growth of investment seen in later stages such as Series B, C and D rounds. Data from the OECD Entrepreneurship Financing Database shows the following:
- UK in 2010, just over $496,000,000 USD went into later stage ventures compared to just $15,500,000 USD in seed rounds.
- Overall, seed investment made up just 1.6% of all VC funding in the UK in 2010.
- In contrast, seed funding made up 5.4% of investment in 2021 in the UK.
- In the US the percentage allocation of capital to seed investment more than tripled between 2010 and 2019.
This data shows that accessing venture capital for early-stage businesses is easier than ever… Right? Well, it appears that is not necessarily the case.
This shift towards investing at an earlier stage means that seed VC funding for founders should be more accessible with more capital heading their way. However, whilst initial numbers seem promising, many startup founders are claiming that raising VC investment is harder than ever before. If you are a founder looking at raising capital and you are having difficulty, take this free online investment readiness check to gain more insight.
Additionally, Venture Capital have also raised expectations for early-stage investments. It’s evident then that there has been a notable change in Venture Capital investment trends over the past few years – however it may appear to no longer be easy to acquire financing from Venture Capital despite the increase of available funds.
Why Might Securing VC Deals be Harder Now Despite Increases in Funding?
Rising Ticket Sizes
Venture Capital Ticket Size
- The median deal size of venture-backed companies worldwide rose from $0.5 million to $0.6 million between 2010 and 2014.
- Deal size then skyrocketed from $0.6 million to $1.8 million between 2014 and 2022.
Source: KPMG; PitchBook Venture Pulse Q2 2022, page 8
Venture Capital (VC) funding for early-stage companies has been seeing a gradual rise in the last decade. However, this growth has stemmed in a large part from a corresponding rise in the ticket size as per the above data. This creates an interesting dynamic. While VC funding appears to be on an upward trajectory, the capacity of individual investors and venture funds to spread their capital is not, resulting in fewer successful deals overall. The sudden emergence of tech entrepreneurship combined with the steady change in Venture Capital investment trends over the past 10 years has created an environment where relatively fewer seed-stage startups may be able to access Venture Capital investments compared to before.
Causes of Changes
Recession and Recent Tech Downturn
Venture capital investments have felt the shockwaves of the recession fear and tech downturn. With uncertainty surrounding the global economy, venture capitalists are re-examining their investment strategies to ensure they remain competitive in a quickly changing market. Venture capitalists are scaling back investments in traditional asset classes such as real estate and making investments with more modest valuations.
Whilst this may indicate a decrease in venture capital investments overall, some investors are taking advantage of the opportunities presented by new technologies disrupted by the recessions, providing badly needed financing for innovative products during troubled times. As technology continues to rapidly evolve and new trends emerge, venture capital firms must stay ever-vigilant to take advantage of these dynamic times.
Changes in Trends
Over the last decade, start-up companies have been able to find more options other than Venture Capital when it comes to raising capital for the early stages. This includes angel investors, syndicate deals, and even crowdfunding platforms. The global crowdfunding market is expected to reach $43 billion by 2028. The availability of these new sources of funding has meant that entrepreneurs no longer need to rely solely on Venture Capital in order to grow and scale; they now have more flexibility when seeking out resources. As a result, the startup world has found itself opening up to numerous innovative ideas without risking the full commitment of Venture Capital funding.
The Emergence Micro-VC’s
Over the past decade, Venture Capital (VC) investors have implemented an ever-shifting landscape of financial strategies to support startups. Recently, micro-VCs have risen in popularity among Venture Capital investors as they offer an alternative way to rapidly raise capital. These micro-VCs focus on investing relatively small amounts across early-stage startups and are often more agile than traditional Venture Capital funds when it comes to identifying fast-paced investments and opportunities.
Aiding entrepreneurs in their mission to secure sufficient funds for expansion, micro-VCs alleviate the burden of obtaining large sums of money from a single Venture Capital fund or similar investor. As a result, Venture Capital investing has become far more accessible in recent years, with micro-VCs providing a viable pathway for businesses seeking financial resources for growth.
Valuations and Profitability
Startups have seen significant changes in valuations over the past 10 years; what was once valued by profitability and growth potential has shifted to companies opting to prioritise rapid expansion rather than monetization. This caused valuations to skyrocket as businesses looked to expand their presence in various industries across the globe. However, market changes over the last year have reverted this, with VC’s focusing more on early profitability than rapid growth and speculative profitability.
Additionally, a larger focus on international markets has also influenced startup valuations, allowing companies to enjoy rapidly increasing revenue even with limited domestic customers. Ultimately, the changing landscape of financial interest in startups has had an enormous impact on the way these companies are valued over the last decade.
The Future of Venture Capital
Venture Capital has been an ever-evolving role in the business world, and its outlook for the future is certainly one that promises much potential. By many metrics, 2023 looks set to be a strong year for companies looking to raise VC after a clawback of investment in 2022. VC firms are positioning themselves to capitalise on emerging technical opportunities, especially within the digital sphere. As academics and entrepreneurs continue to innovate and push boundaries, Venture Capital will remain at the forefront of financial growth by offering services such as venture debt, private equity, and other strategies. Venture Capital is also enabled with excellent analytics techniques to better evaluate technological trends and assess market gaps. Therefore, it should come as no surprise that VC’s will continue to shape the future landscape of technological advancements many times over.
Oliver Kennedy, a 20 years old aeronautical engineering student at the University of Glasgow, and who has experience working with startups and angel investors, is
passionate about understanding venture capital trends and the subsequent impact on founders and startups. He writes analysis reports for the Trading and Investment Society alongside his studies and has developed his own website for supporting founders on their investment-raising journeys.