Aileen Lee, a venture capitalist, coined the term "unicorn" in 2013. In 2013, 39 were created. In the United States, there have been 264 companies that have achieved such valuations by 2021. Every day, multiple startups become unicorns around the globe.
Venture capital's success this year is evident by the staggering pace at which companies achieve billion-dollar valuations. Pitchbook senior analyst Kyle Stanford says that $240 billion was invested in VC-backed businesses this year. This would seem unbelievable a few years back. Venture capital is attracting more capital than ever before.
According to new data from Pitchbook, the National Venture Capital Association, over $82 billion was invested in American startups between July and September. This is about the same amount venture capitalists spent in 2017 which was at the time the highest level of venture capital spending since 2000's dotcom boom. Crunchbase reported that the Q3 total was $160 Billion, which is a record for any quarter in recent history. Also, deal sizes have increased: The average early-stage deal in America is now $20 millions.
All parts of the startup industry are being flooded with this money, including angel investments and late-stage deals. Pitchbook describes nontraditional investors as those who are involved in private equity, hedge funds or corporations. These individuals have more money than the average Sand Hill Road fund. To get a share of the great profits, these investors have pushed their way into venture capital. The market's exit value, the amount of a company's worth after it goes public or is acquired, has surpassed $500 billion. One quarter remains. This is already twice the record set last year.
The pot of gold at its end is what investors are after, and that's why they all want to be an investor. Because ventures have been one of the most successful asset classes in recent years, everyone is interested. A number of companies, including Toast, UiPath and Coinbase, have gone public in the last year with valuations above $10 billion.
According to David Hsu of the University of Pennsylvania's Wharton School of Business, these huge returns have accelerated the VC cycle. Investors are attracted to big exits which in turn fuels VC interest to invest in future startups.
Hsu believes that emerging technologies like AI and blockchain have led to many new startup innovations. He says that Covid's economy has also benefited other companies, including some areas of ecommerce, deliveries, and logistics. VCs are paying more attention to these startups, but Hsu warns that their business models will not last forever.
Others are less optimistic. It's very frosty out there. Carey Smith, founder of Unorthodox Ventures in Austin, believes that people are simply throwing money around. Smith says that startup innovation is the driving force behind the current VC bonanza. He believes it has remained relatively flat over time. He says that he would bet less than 1% of startups today are viable businesses. Smith said that although VCs are expecting many of their investments will be duds founders may get screwed. The risks of raising capital at a high valuation come with their own risks. Future investors could reevaluate your company and reduce your equity if you don't live up to the standard.