The last 12 months have provided us with shocking lows and surprising highs. In startup land, great expectations in January and February were followed by dashed hopes in March.
Those woes were followed by April despair, surprised optimism from May through June, and, finally, a straight shot all the way to the moon through December.
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It’s been a lot. But it’s all behind us. We don’t need to spend more time thinking about 2020 for now. We need to look ahead.
This morning, I’ve compiled notes on what’s coming. We have notes from GGV’s Hans Tung on the 2021 IPO market, Sapphires’s Beezer Clarkson on what fundraising will look like for VCs next year, and a prediction from the PitchBook analyst crew that caught my eye.
This is the last Exchange column for 2020. Thanks for reading so I could keep having fun every day at my job. Now, to work!
2021
We’ll start with the 2021 IPO market, only because so many of you cared so very much about it this year.
Hans Tung, an investor at GGV and recent Extra Crunch Live guest, is an investor with an international perspective and a good read on global startup liquidity. So, when I got on the phone with him last week to catch up, I wanted to know his read on the 2021 IPO market.
Given that we’ve seen a number of blockbuster IPOs this year, I was expecting him to forecast an active start to the year. Correct.
But Tung added that while Q1 could be very busy, Q2 could present a lull. Why? Tung expects IPOs that failed to finish the job in Q4 2020 to slip into the first quarter of next year. That explains why the first quarter is busy. But why the slowdown in the following three months?
Because to go public in Q2, Tung explained, you have to have your 2020 financials done. If you go public in January or February, he said, you can use Q3 numbers from 2020. That saves time.
But don’t think that next year’s IPOs will end after February. Tung predicted “quite a bit” of public-market liquidity for startups in Q3 and Q4. (This generally bullish 2020 IPO sentiment is matched by an EquityZen dive into the 2021 IPO market, which said it expects “the 2021 IPO market [to] follow the strength seen in 2020 with many unicorns going public and raising significant funding.”)
My read of Tung’s view is that so long as public markets stay elevated, IPOs will stay active. And that means 2021 could be even busier than 2020.
This means that the conditions that helped make 2020 an attractive year for VCs to raise could persist into next year. But if so, which investors succeed in attracting backers could change.
Sapphire’s Beezer Clarkson told TechCrunch that limited partners — the folks who write VCs checks — are still very much into tech, adding that this year’s liquidity — IPOs, M&A, etc. — helped the venture industry itself raise more capital.
But in 2021, Clarkson said, the pendulum could swing away from megafunds — recall that many of them raised this year, meaning that they have already had a turn at the trough — toward smaller venture firms.
2020 was a hard year for first-time managers, she said. But the Sapphire denizen also thinks that 2021 could be better for younger venture portfolio managers, which could help with the diversity of the ranks of the venture industry; venture capitalists tend to be more diverse in earlier stages of investing.
If the 2021 IPO market proves to be as strong as Tung expects, driving more VC portfolio liquidity and LP enthusiasm for tech shares, Clarkson’s prognostications could bear out. If they do, it will have more impact than merely helping a few more fund managers keep their gig. That would be incredibly welcome.
Finally: the future of the Bay Area as the center of startup gravity. The Bay Area has been losing centrality for some time. Per a recent PitchBook report, the region recorded around 26% of United States venture capital rounds in 2011. By 2019 that had fallen to 23.4%, and the metric had fallen to 22.4% through Q3 2020.
Here’s the report:
Despite Silicon Valley’s continued dominance and rising yearly deal counts, its proportion of total VC deal count activity in the U.S. has softened, falling nearly each year since 2006. The COVID-19 pandemic and subsequent exodus from San Francisco will only exacerbate this trend. Given these factors, we expect the Bay Area’s proportion of VC deal count in 2021 will fall below 20% in the U.S., the first time in our dataset.
If the Bay Area slips below the 20% mark, it will mean that more than four in five domestic venture deals will happen outside of the region. Currently, a bit more than one in five happens there.
If the 20% threshold is breached, expect Twitter to be very annoying. Mostly I am watching to see if the pace at which the Bay Area loses dominance accelerates, as PitchBook expects it to. If it does, then perhaps we are seeing the balloon deflate, rather than the rest of the country’s venture scene mature.
So, lots more IPOs, a shot at more diverse venture capital distribution and a more equal domestic investment map. That’s not too bad, is it?
Yes, but …
Unless it all falls apart. Watching the stock market’s inexorable rise, software valuations continue to stretch, crypto rise, and pretty much everything look and feel expensive as the United States teeters on the edge of an eviction crisis has me worried.
Startup folks expect quite a lot of activity next year. And they are probably right. They have been for over a decade now. And being a perma-bear is only a career path if you want to be a CNBC court jester. But at some point, some of the excess in the market will need to be let out. Maybe that’s in 2021. Maybe it’s not. But there’s quite a lot of implied bullish expectation in nearly everyone’s views concerning next year.
So, onto 2021 we go. Let’s see if the bulls are right again.