Thanks to the pandemic, US venture investors are having their biggest year ever

Investment in US startups is on a tear, threatening to eclipse $200 billion this year for the first time ever.

Through the first half of 2021, nearly $140 billion has been invested, according to EY, the accounting and consulting firm, primarily driven by bigger fundraising rounds. Nearly 60% of all capital raised in the second quarter came from deals worth more than $100 million, said Jeff Grabow, EY’s venture capital leader for the US.

At the current pace, the flood of dollars will shatter last year’s record of $153 billion. Investors outside the US are similarly enthusiastic. In Europe, venture investing is up 215% from last year, while Asia saw more modest gains.

Investors in 2020 were “defensive,” meaning firms were deploying capital because they weren’t sure if there would be another chance, Grabow said. This year investors see opportunities everywhere. “We’ve gone from a defensive funding mode to a growth mindset and that is driving a lot of activity,” he said.

The biggest areas of investment are startups supplying information technology (1,789 deals so far this year), business and financial services (1,199), and healthcare (1,093), although Grabow say the definitions of the sectors can blur. Much of the investment is going to companies developing technology that proved its value during the pandemic as the world changed how it worked, traveled, communicated, and shopped.

Most startups have thrived during the pandemic, with 4.4 million new companies launching last year, a 24% increase over 2019, according to the Peterson Institute for International Economics. That’s in part because the cost to launch a new company has never been lower, Grabow said.

The rush of investment in startups continues a decades-long trend of institutional investors taking riskier bets. University endowments and insurance companies are pouring money into non-traditional asset classes like private equity and venture capital as they chase higher returns than those available from stocks and bonds. Grabow says private equity and sovereign wealth funds that once invested in startup companies through initial public offerings are now getting involved earlier, and behaving like venture capital firms with a lot more money to spend.

Eventually, all the investors will expect to see a return, either through an IPO or a buyout. There are only three outcomes for these startups, Grabow said: “You go public, you get acquired, or you go out of business.”

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