The VC industry roared ahead, setting records in Q3 and putting 2021 on track for another record-breaking year for venture investment, exit activity, and fundraising, despite mixed macroeconomic signals and a prolonged pandemic.
Welcome to our quarterly VC benchmark, where we will be breaking down VC activity in the US, Europe, and LatAm and what it means to you as an investor or founder. After going through extensive market intelligence from the industry's most trusted sources, here’s the top-line review of what went down in the Venture Capital world in Q3 of this year.
But First...
Almost 3x that of last year. This shows that VC investment in crypto space has really come to age since the ICO mania of 2017-18. VCs are now becoming more comfortable with crypto and blockchain startups in general, and its no surprise given the public interest in this space thanks to bull run in crypto markets this year. We'll be covering this theme further in the second half of this report but first let's look at what happened in the VC markets in Q3.
Eighteen months into the COVID-19 pandemic, the VC industry has continued to prove its resiliency while also directly supporting the economic recovery and strengthening public markets.
Investment activity was healthy across seed, early, and late stages with deal size increasing for the latter two, continuing a long-term trend.
The growing participation of well-resourced nontraditional investors such as mutual funds, PE, hedge funds, and crossover investors in the venture space has contributed to the rise in deal size and valuations, reshaping the industry landscape in the process.
Covid is not stopping growth
Startups in Q3 are continuing to roll through previous year’s records, with 2-3 unicorns being minted everyday, compared with 1 every 2-3 days last year (Crunchbase)! When measuring different regions compared to the same time last year, Venture funding in the USA was up 78%, in Europe it was up 88%, and in LatAm it was up a mind-boggling 465% (more on LatAm later)!
Europe's deal value drops
But it was the only region to do so. The USA and LatAm both reported all-time-highs for quarterly VC Investment totals. The USA topped $86 billion while LatAm reported $8.6 Billion (almost 3x of Q2!) The LatAm market continues to show incredible rebound despite all the political and economic uncertainty in the region.
The big picture
Both early- and late-stage fundraising was on fire. Hence, we saw VC investment in all three regions at near record levels in Q3.
Funding in Q3 held steady from last quarter at around $122B, solidifying Q3 as the biggest quarter in investment dollars ever, almost doubling (89%) of last years numbers. Across USA and Europe, deal counts dropped 10% and 20% respectively. LatAm bucked the trend, where deal counts jumped 10%.
USA VC Landscape in Q3 ‘21
Europe VC Landscape in Q3 ‘21
LatAm VC Landscape in Q3 ‘21
Florida is going strong
Seed and early-stage investment in Florida is up several folds YoY, with Miami startups making up the bulk of it.
Across all stages, Florida funding is also going strong. But early-stage deals factor heavily into these totals. So far this year, Florida companies have raised just over $1 billion in early-stage funding, almost 4x of 2020 total!
But it's truly justified. As one of the VC pioneers in Miami, TheVentureCity established its root in the city back in 2017. Since then, we have seen founders, investors and local ecosystem players working together for years to build up the startup momentum.
Overall, startups with a woman founder raised $25 billion in the first half of 2021—more than the total amount raised by women any full year prior. VC funding for female-founded or co-founded startups on both sides of the Atlantic, has been trending up in recent quarters. In Q3, $15.7B of VC money went into US-based female (co-)founded startups, up 20% QoQ but an astonishing 2.8x YoY! (Pitchbook). Europe saw $3.1B going towards female founders, down 23% QoQ but still up 55% YoY! (Pitchbook).
Percentage wise, the amount of venture capital going to female entrepreneurs in 2021 was lower than it has been for the last five years. The gap was particularly true for all-female founding teams, which have raised only 2.3% of VC funding this year, according to Crunchbase. Last year, companies founded solely by women garnered 2.2% of the total capital invested in venture-backed startups in the US. On the other hand, startups with mixed-gender cofounders raised 11.7% of funding, while men-exclusive founding teams took 86% of venture funding.
And a lot of effort is needed into creating more female VCs that can fund female founders and bring them into the network. All Raise estimates that 65% of VC firms don’t have a single female investor in their ranks and only 14% of VCs can actually write checks as of today. Out of 351 venture capital firms in the United States, only 34 firms had two or more women in decision-making positions, according to an Axios analysis.
Seed funding
But still 25% up YoY. Note that data lags for seed funding are the most pronounced, so these percentages will likely increase overtime. Overall, deal counts were also down 14% QoQ and 20% YoY, but this is normal as we expect this number to increase as more data comes in.
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The trend of large, multi-stage investors getting involved sooner in the venture lifecycle is now the new reality and the outlook looks bright for seed stage funding.
During Q3, both Andreessen Horowitz and Greylock announced new seed-focused funds of $400.0 million and $500.0 million, respectively.
The size of seed funds are also getting bigger, because investors now realize that having such big seed funds will give them flexibility in terms of not only the number of portfolio companies, size and valuation but more assurance that they would be able to follow-on their front-runners in to Series A and beyond.
Early-Stage Funding
Recording an All Time High. With $30 billion in deal value, Q3 is up 88% YoY! Round count clocked in at 2033 for Q3. That’s down a bit from the previous quarter, but still marks the third-highest total over the past two years. Overall, early-stage VC is certainly not likely to be slowing down in Q3/4 of 2021 and is only solidifying the prospective for a record year in the industry.
Early-Stage Frenzy
The accelerated pace of investments has spurred frenzied competition among investors to identify and fund promising early-stage startups.
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As covered earlier, the rising prevalence of crossover investors coming earlier in the venture lifecycle in the last 9–12 months has pushed deal sizes upwards and skewed the distribution of deal sizes toward the larger end.
Both Seed and Early-stage are showing signs of the inflationary pressure in deal sizes from the abundance of capital within VC.
Late-stage funding
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Q3 has continued with the rapid late-stage dealmaking trend that we have seen so far this year. This speaks to the swelling demand from the market for late-stage growth opportunities.
Same story here, the growth in nontraditional involvement has been a critical factor driving this pricing phenomenon given these investors’ deep pockets and ability to expedite deal closing by offering a more hands-off approach.
The expansion of available capital at the late stage has been the consistent driver behind the growth in deal sizes and valuations since most of the marginal capital entering the VC strategy has been allocated to the more mature startups.
No longer a monolith
This explosion of attention includes institutions, particularly VCs that have deployed $19 billion on crypto projects. While the number of users connected to blockchain grew 25% quarter-over-quarter and 509% year-over-year, reaching 1.54 million daily UAW on average during Q3 [DappRadar].
NFTs exploded in popularity
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We have covered NFTs in the past so we don't go into detail here, but please see the previous reports.
As a refresher, Non-Fungible Tokens (NFTs) are cryptographic tokens meant to serve as a digital certificate of authenticity, on a blockchain, that undisputedly proves that the holder owns a one-of-a-kind digital (or even physical) asset.
The new piece in the puzzle
Good news for gamers
Hence, P2E blockchain gaming space will be a huge growth driver for NFTs. Axie Infinity has become the spearhead of the P2E movement. The dapp dictates the pace of the game sector and it looks like it will just become stronger. Axie Infinity just had another impressive quarter, which saw it surpassing 1.5 million active users during Q3. In addition, during this quarter, the game generated over $776 million in revenues. Easily surpassing entire blockchains like BSC and Bitcoin.
NFTs took the crown
Dapper Labs, the Canadian start-up behind digital basketball trading card platform NBA Top Shot, is now valued at $7.6 billion following a $250 million funding round led by Coatue.
Sorare, a French fantasy soccer game that incorporates NFTs, raised $680 million in a round led by SoftBank which valued the company at $4.3 billion.
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We see the P2E movement as the key driver in the continued adoption of crypto, in the short to medium term.
Despite ups and downs in the crypto market, the play-to-earn movement has continued to add gamers bringing them on-chain.
On top of that, NFT infrastructure that includes minting platforms, protocols and marketplaces is evolving at an earth shattering pace, making it ever easier and cost-effective to mint NFTs. Bundle that with rising NFT demand coming from the gaming industry and P2E movement, and it's crystal clear that the NFT market is here to stay as it adapts to the creative preferences of a new digital generation.
It would be a shame at this point to not introduce the Metaverse. Although we don't have time to cover Metaverse in any detail, we would remiss if we didn't at least give it a shoutout.
Metaverse is poised to a multi-trillion-dollar digital economy that could potentially replace the internet with shared virtual worlds.
Think: Internet Today as 2D and siloed vs Metaverse, 3D and interoparable.
According to Mark Zuckerberg, Metaverse will be the holy grail of social experiences.
"The metaverse is the new world. It’s a land of infinite opportunity where first-time coders can disrupt banks and 12-year old entrepreneurs can become financially independent. - Bankless"
Public market investors, which typically follow private market (VC) investors in backing disruptive tech, are on par with the private markets this time and have already started taking notice of the potential of video games beyond just gaming.
Roblox is a gaming platform that lets users play, build, and monetize games and is currently valued at $46.52B in the open market - almost 2x since it's last round in Jan 2021.
Epic the leading contender in the Metaverse race due to the popularity of Fortnite and the Unreal Engine’s position as the most robust engine for 3D experiences, announded its latest round in April, when it raised $1B at $29B valuation and did more than $5.1 billion in revenue last year.
With the likes of Epic, Roblox etc seeing strong usage and revenues, the valuations are just an indicator of the what both public and private investors see for the future of Metaverse.
Endless possibilities
We have been excited about the potential of Web3 and Metaverse for a while. Web3, the decentralized evolution of the internet, is likely going to be the determining factor for the Metaverse vision to come true, and the NFTs would be the bridge between Web3 and the virtual economy of the Metaverse. [Read more here]
Plus NFTs, DeFi and how they piece together and how they'll interact with the Metaverse. Our goal would be is to translate to a broader audience, and flesh out some nuances underlying the future of this tech.
Stay Tuned...
