Record breaking investment in the venture capital market will require record IPOs
2021.10.20.
by Computerworld
The international venture capital market broke record again after the first and the second quarter. Comparing to the last year Q3 quarter the total investment around the world have been doubled. The average investment by different projects increased too, as 60% of the total investment is more than 100 million USD.

In a classical investment process, startups tend to go through in various investment rounds, walking through the total investment ladder, however these giant investments put the market on the edge of the ladder. Worldwide this was the third quarter when around 100 or more company reached the unicorn level, as known as the 1 billion USD in valuation. The above-mentioned number means that around a hundred billion USD haven?t been sold and may created unsellable value in only one quarter.

The number of unicorns before the ?exit? are growing in the recent years, however the last three quarters boom created a squash. It raises the question if these ladders which represent the sum of the capitals can withstand the pressure, and if these startups can exit in a decent time? Recent experiences show that since these unicorns exist, there hasn?t been any time when more exited than appeared on the market, which in the case of the whole ecosystem is regrettable.

Venture capital funds have two ways to have return on their investments. One of them if the startup exit, so they get bought or goes to the stock exchange market, the other one if a next round investor buys them out. As the next round investor is another venture capital fund it is irrelevant from the point of the whole ecosystem. In case of acquisitions made by MNCs there hasn?t been any changes in the last three years, which is not a surprise as there budget on investments and human capitals will not change in accordance to growth of the venture markets. Meaning we are left with one choice to decrease the pressure, and it is the IPO

Negative perspective on companies which get constant capital injection, that they might stuck as they cannot go to the public market on a price where they have been predicted during previous investments or where they have imagined. However, it will not be a problem due to the positive attitude of venture capital, as it is expected for these companies to show a constant grow. There are no limits, and they can start a profit maximizing policy after the acquisition of the market share, thus make the predicted valuation into real life.

To tell the value of a software developing company is almost impossible, as data is for years now way more valuable than gold, but it doesn?t mean that they can turn data into effective revenue generation. According to the positive perspective we can see that the dissonance between the stagnated IPO and the growing numbers of unicorn should dissolve, so a record breaking IPO should happen.

It is important to state, that venture capital include the word risk, as most of the startups fail. Obviously this risk exist from the beginning of the investment, and it is natural that most of these companies bring a negative return, but those who win, makes the total return of the investor positive. In the recent years it was a beneficial business idea to invest in startups, moreover state actors are regrouping resources to this field, which results in more capital and more investment on the market, which makes the appearance and the rapid growth of the unicorns.

On some point the business cycle will slow down and return to something more conservative. Some startups who wait to exit on a higher value might lose the opportunity which might not even face them back on a more conservative scenario either. It would be healthier if startups would choose to go to the stock exchange as soon as possible, but as the risk capital valuation effect is high and it is easy to raise capital, it is an important question who will choose the harder way?

(Botond Mikó, CEO, Exagent Group)

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