After a deal-making dip at the start of the pandemic, venture capital activity in the U.S. is pacing to break records set last year, according to the second quarter Venture Monitor report from PitchBook-National Venture Capital Association.
In Arizona, both the number of deals struck this year and the amount of money represented in those deals are on track to beat last year's results. Venture Monitor tallied 71 deals in Arizona in the first half of the year through June, representing just over $380 million in funding.
If this pacing continues, Arizona will likely land among its historical highs in terms of the number of deals, but hitting the all-time high of $946 million from 2019 seems unlikely.
The biggest VC deal secured in Arizona during Q2 was Lessen’s $35 million Series A round, which CEO Jay McKee said will help the company more than double its revenue in the coming years.
Lessen was followed by Trainual’s $27 million raise, MIND 24-7’s $20 million raise, which the company will use to build mental health clinics, and Prenda’s $19 million raise that came in the midst of a reported investigation by the Arizona Attorney General.
VC nationwide
In 2020, VC firms invested $164.3 billion across more than 12,300 deals nationwide, but in the first half of this year alone there’s already been $150 billion put into 8,400 deals.
The report said deal flow at all stages of growth appear healthy this year, but the record-pacing deal value is mainly driven by larger and later-stage rounds driving up the total figures.
The Covid-19 pandemic has killed millions worldwide and disrupted the lives of everyone else, driving some seasoned executives out of corporate life and into the startup world. The report notes that this change in startup leadership helps explain some of the deal volume in earlier rounds, but it says other factors are likely at play.
Nontraditional investors, including mutual funds, hedge funds and corporate entities, have also increased their investing activity this year.
These investors are a relatively recent addition to the startup funding marketplace, according to the report, but they’ve consistently picked up their activity since 2018. In the first half of 2021, these non-institutional investors have already put up $115.9 billion, which nearly matches their 2020 total.
“U.S. venture investment levels continue to rise as mega-deals become more common and nontraditional investor participation in VC becomes standard. As the industry looks toward the second half of the year, investors are evaluating whether this level of dealmaking will persist and what its broader impact might be,” Pitchbook CEO and founder John Gabbert said in a statement.
Slowdown ahead?
Venture capital has been on a roll in Arizona and across the country, but larger macroeconomic trends may hamper the record-setting pace in the future.
On Tuesday, the U.S. Department of Labor released its updated Consumer Price Index that showed a 5.4% increase from a year earlier, which is the largest 12-month increase since August 2008.
If inflation continues to rise and the Federal Reserve raises interest rates to counter it, the limited partners that invest in VC funds may come to find other asset classes more appealing and decrease their venture investing. But PNC Financial Services Group Chief Economist Gus Faucher said raising inflation is not a guarantee.
“The headline inflation numbers have been eye-popping in recent months, but underlying inflation remains under control,” he said in a research note. “The big concern is that current high inflation gets built into consumers’ and businesses’ expectations, leading to higher long-run inflation, as happened in the 1970s. However, the temporary nature of current inflation pressures, and Fed watchfulness, should prevent this from happening.”
