2019 is set to be a record year for venture capital funding. Driven by mega-rounds, start-ups around the world have raised unprecedented levels of…
The term mega-round is shorthand for a start-up’s fundraising round of $100 million or more. In 2017 and 2018, such rounds comprised an impressive 45% of all U.S. venture capital funding. In Q3 of 2018 alone, U.S. tech start-ups collected 55 mega-rounds for a grand total of over $14.1 billion.
What was once a rarity has become practically routine – so much so that CB Insights, a tech market intelligence platform that tracks scale-up investment, has even considered adapting its definition of a mega-round to $200 million or more. Mega-rounds have shown no sign of slowing down this year and 2019’s mega-numbers are poised to surpass the 2018 figures. The rise of the mega-round has gone beyond being a mere trend; it may just be the new normal.
This trend is by no means confined to the U.S. and Silicon Valley start-up ecosystem. A report on late-stage technology funding in Europe and Israel released in early November 2019 looked at mega-rounds in the period Q1 2015 to Q3 2019. According to the figures analysed, 2019 is already a record year for late-stage investment in European technology companies, with 52 mega-rounds, including Deliveroo (UK), N26 (Germany), Klarna (Sweden) and Doctolib (France). The data also shows that number of mega-rounds from Q1 2019 to Q3 2019 was almost four times as high as those recorded during the entire two-year period between 2015 and 2016. For 2019 in total, the study predicted around 70 European mega-rounds.
We consider that macroeconomic conditions continue favouring investments in the private market over public markets. This view seems to be shared by others as well. In recent years, the investors’ increasing appetite for alternative investments has created considerable growth in the amount of capital available, with venture capital as well as private equity funds raising record sums of dry powder ready to invest.
Driving the increase in overall venture capital deal value are, in particular, late-stage start-up companies who have reached a certain level of maturity and need capital to grow further but do not yet want to go down the IPO route. Investors’ search for yield, coupled with a tendency among tech start-ups to stay private for longer, have fuelled the rise of mega-rounds as well as make them increasingly common.
Looking at this tendency of ‘first grow, then IPO’ in a bit more detail, analysis shows that IPOs may not be the most effective initial route for rising start-ups with a view to overall long-term value creation. Data from 2012 to 2015 revealed that companies entering public markets at a higher market cap (above $1 billion) achieved a 60 percent higher sales multiple valuation than companies with a lower market cap (under $500 million). Our interpretation of the data indicates that, for smaller tech companies, it is more profitable to delay going public either by growing privately before entering stock markets or, alternatively, through being acquired by large tech companies.
Ultimately, growing – and growing fast – is inherent in the tech start-up business model. To facilitate market power, such businesses need to compete with incumbents, deliver value to customers and exhibit strong customer retention. Rapid growth, however, requires funding. Since technology has now made its way into virtually every industry sector, and is certainly not going away any time soon, investors are keener than ever to become involved in innovative developments.
investment sectors leading the charge. Finance, as a notoriously traditional industry, has seen some of the most interesting tech-driven developments – be it AI or blockchain – that have established whole new ways of banking or providing consumers with financial services. The speed of technological developments has moved increasingly faster in recent years, spurring a financial services revolution. Venture capital funds are more and more keen to capitalise on these growth opportunities in fintech.
A recent CB Insights report confirmed fintech’s place at or near the top of the mega-round food chain, with fintech start-ups commanding the most funding of any sector in Q2 2019. Fuelled by mega-rounds, these companies raised $8.3 billion on aggregate.
Another example is Blend, a San Francisco-based consumer-lending platform developer that provides increased access to home ownership, that raised $130 million in June. The funding round was co-led by Singaporean investment company, Temasek, and New York growth equity firm, General Atlantic.
The surge of mega-rounds is mirrored by private equity firms and venture capitalists who have stepped up their efforts to invest growth capital in start-ups and scale-ups. Across Europe, the U.S. and Asia, investment firms are setting up new funds that focus on specific sectors such as social impact and software-as-a-service. No longer a “maverick” investment, start-up funding has become an established option to tap into opportunities provided by either new tech companies disrupting traditional industries, or more mature tech businesses developing innovative products.
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