After a banner year for venture capital in 2021, Philadelphia-area VC leaders predict that local startups will continue to secure huge deals for growth capital.
Greater Philadelphia startups raised a total of $8.1 billion last year, shattering the previous record of $2.7 billion set in 2020. More than 10 companies in the region secured “mega rounds” of over $100 million – including Gopuff, a Philadelphia-based delivery startup that raised $3.65 billion last year.
PHL Inno chatted with the heads of two of Greater Philadelphia’s most prolific venture capital firms to break down what led investors to drive so much funding toward startups in 2021 and what they anticipate will come in 2022.
Darren Sandberg, a managing partner with health and security technology VC firm Dreamit Ventures, said there’s little reason to believe that the pace of investment will taper off.
When the Covid-19 pandemic started, Sandberg said he initially believed that deals would slow down. After nearly two years, it still is not the case. His firm’s partners are now encouraging Dreamit to increase its rate of investment in response to the feverish investment market, he said.
The red-hot deal pipeline has all been driven by supply and demand, Sandberg said, as the availability of capital has vastly outweighed the number of “quality” startups. That demand for those startups is leading to larger funding rounds.
Institutional investors are seeing opportunities for returns in the private sector, particularly with early-stage startups, Sandberg said. Nontraditional investors like hedge funds, private equity firms and family offices are increasingly investing in startups, as well.
“There still seems to be the perception or the reality that there is a lot of returns still to be had within the private market, and that's really what's driving the allocation of capital to these companies,” Sandberg said.
Public markets are also doing well, which only fattens the wallets of existing investors. The S&P 500 was up 26.7% in 2021, while the Dow Jones Industrial Average was up 18.7% and the Nasdaq Composite gained 21.4%, signaling a strong year of growth for investors.
“Macroeconomics can change things, something can happen, of course, but we don't see much changing in terms of valuations and number of deals getting done,” Sandberg said.
Holly Flanagan, managing director of Gabriel Investments, said in an email that Philadelphia has a “strong pipeline” of new and expanding companies, which has led to the sharp uptick in capital going to local startups.
“We continue to see strong deal flow and assume this will continue through 2022,” Flanagan said. “We are seeing companies that pivoted during the pandemic and are now stronger and better positioned.”
One area company that pivoted during the pandemic and raked in investment capital was Misfits Market. The “ugly produce” vendor expanded its product offerings to include perishable goods and proteins, and the startup raised a total of $425 million in 2021. Now a unicorn with a valuation topping $2 billion, Misfits Market is expanding quickly and hiring hundreds in Greater Philadelphia.
Flanagan and Sandberg are also seeing more capital flowing to Greater Philadelphia startups from firms outside the region. Some of Greater Philadelphia's biggest deals last year were led by firms like Silicon Valley’s Andreessen Horowitz and Sequoia Capital, and Chicago’s Baird Capital. Flanagan and Sandberg expect outside VC capital to continue to enter the region but for deals to be done in partnership with Philadelphia firms.
“I see more capital being deployed by local investors, just as the rest of the world has been experiencing this increase … it’s the same in Philadelphia,” Sandberg said.
