VC Valuations Climb Higher Still as Hedge Funds and Other Nontraditional Investors Pile In

Hedge funds and other nontraditional investors are pumping more money than ever into venture capital deals — driving valuations to new heights, according to PitchBook. 

Early-stage valuations, which includes series A and series B, have gotten so high that they are beginning to resemble the late-stage valuations of previous years. In 2021, the median early-stage pre-money valuation reached $45 million, a 50 percent increase from 2020, PitchBook said in its annual U.S. VC valuations report.

According to the report, 231 early-stage deals were raised at valuations of $200 million or above compared to 65 deals in 2020. In 2016, only 24 deals reached those heights. 

“All over the venture market, there’s a ton of money,” Kyle Stanford, a senior venture analyst at PitchBook, told Institutional Investor. “With the amount of capital that is chasing yields, founders that have a strong story or some strong traction are able to generate much higher valuations than they were in the past.” 

Late-stage valuations also climbed higher in 2021. While the median late-stage valuation has remained steady over the past few years, it shot up to $488.5 million in 2021 — a 28 percent increase from 2020. Stanford and his co-author Cameron Stanfill, also a senior VC analyst at PitchBook, attributed this rise to the “ever-increasing” size of traditional VC funds, as well as rising nontraditional investor activity in late-stage startups. 

PitchBook defines a nontraditional investor as an investor that doesn’t take the form of a VC fund, an angel investor, or a start-up accelerator. Stanford said the most active nontraditional investors are typically hedge funds, mutual funds, private equity funds, and corporate investors. 

In 2021, nontraditional investors participated in a total of 5,229 deals with a collective value of $255.1 billion. This marks the most capital that has ever been invested by nontraditional investors in any year on record. It’s also a steep increase from 2020, which saw nontraditional investor participation in 3,935 deals valued at a total of $127.2 billion.

This amplified involvement by hedge funds and other market participants has translated into higher valuations for deals with nontraditional investors than for those without their participation. For instance, in 2021, the median pre-money valuation for late-stage deals with nontraditional investor participation reached $200 million, nearly double the 2020 figure. In contrast, the median late-stage pre-money valuation for deals that had no traditional investor participation was only $45 million last year. 

“Given that nontraditional investors generally have access to larger sums of capital than traditional VCs, their investment has transformed all stages of venture in recent years,” Stanford and Stanfill wrote. “Not only have they integrated additional available capital into already-record levels of dry powder, but the increased number of investors has created a competitive landscape that alone drives higher deal values.”

According to PitchBook, nontraditional investors still participate more in late-stage rounds because of the maturity of the companies and the liquidity they can provide to their portfolios. However, while venture capital is not a core strategy for most nontraditional investors, Stanford said he expects more participation in VC across the board in 2022. 

“As long as there isn’t any enormous macro event or something that really forces them to return to their typical strategy, we would expect them to continue participating in venture in 2022,” he said.