Who is Winning – VCs or Investors?

August 3, 2021

Private equity data provider Pitchbook is always on the move with indicators of the private equity and venture capital dealmaking world. One of their newest indicators – the VC Dealmaking Indicator – gets at the heart of a core question in investing – Who is winning – VCs or investors?

Some important details

In constructing the VC Dealmaking Indicator, Pitchbook considered many factors in deriving their indicator. Among the factors that owners and investors negotiate (and that Pitchbook includes) are cumulative dividends, liquidation participation, anti-dilution terms, board voting rights, general voting rights, median years since last VC, median valuation step-ups, median percentage acquired, and supply and demand of capital.

Some background

First, some background. The following shows the number of startups in the typical VC funnel. The largest bar on the left is companies searching for first round of capital. The funnel narrows moving from left to right. The second bar from the left is companies known of with a first deal. The third from the left is companies known of moving into their second round of funding. The fourth from the left are companies on their third round and so forth moving towards the far right.

Source: Pitchbook

Demand and supply

With this backdrop, what does Pitchbook estimate demand and supply for early-stage and late-stage capital look like? The following has that look.

The dark blue line is early-stage capital supply to demand. The light blue line is late-stage capital supply to demand. Interestingly, in recent quarters a divergence between early-stage and late-stage capital has emerged, with early-stage capital supply to demand increasing to a level that the market hasn’t seen since 2011. Both are on the rise.

Source: Pitchbook

More details on the VC indicator

With the just-mentioned graphs in mind, the following are the weights Pitchbook uses for its VC Indicator.

The measure with the highest weight is VC real overhand to real capital sought ratio at 18%. Three indicators occupy 12% weights – cumulative dividends feature, liquidation participation, and anti-dilution feature. Following these three are three indicators with 10% weights each – percent acquired, median years since last VC, and median valuation step-up (post to pre). Rounding out the weights are two at 8% each – board voting rights and general voting rights.

Source: Pitchbook

VC Dealmaking Indicator Results by Stage

All this background leads to Pitchbook’s new VC Dealmaking Indicator result by stage. Interestingly, recent measures of the VC Dealmaking Indicator suggest some slowing down in VC activity, with both early-VC and late-VC trending down to levels not seen since 2011.

Source: Pitchbook

Parting Thoughts

Overall, Pitchbook’s VC Dealmaking Indicator is an interesting look at the state of VC investing.

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