This bull market has been running for 12 years. How much longer can it run?
There is a lesson from the previous bull market of 1979-2000 that could give us some insight. Georges Doriot gathered together several angel investors to found American Research and Development Corporation(ARDC). Ken Olsen and Harlen Anderson were MIT engineers at the MIT Lincoln Lab. Olsen and Anderson developed a business plan for a computer, but no one wanted to fund their company. After all, RCA and GE had both tried to build and market computers, but both had lost money. ARDC, however, decided to become the first investors in Olsen and Anderson’s company in 1957 with a $70,000 investment. Nine years later, that $70,000 initial investment was worth $38 million when Digital Equipment Corporation had its IPO and sold shares to the public.
ARDC was the first institutional private equity investment firm that accepted money from sources other than wealthy families. It was the launch of the venture capital industry.
The impact of venture capital cannot be understated. One-fifth of current public companies like Google, Apple, Microsoft, and Fed Ex received venture capital financing. Since 1979, 43% of all US public companies have received venture capital. Those VC- backed companies have 57% of the total market capitalization, employ 38% of all public company employees, and account for 82% of all corporate research and development.1
VC-backed firms powered the secular bull market from 1979 to 2000 and continue to power much of the current bull market that began in 2009. 2021 has represented the best year ever, with some $160 Billion invested through the third quarter. That is up from $27 billion in 2009.2
While that trend seems positive, digging deeper uncovers what may be a problem with traditional venture capital. Most venture capital is going to the biggest deals. The amount of funding going into the smaller opportunities has been basically flat for a number of years, and even in 2021, when funding for big deals has doubled, the number of small deals financed dropped by 25%.3,4
It is in the small companies, especially in times of crisis, where a good portion of creative destruction happens. They are the businesses that drive ingenuity and competition, forcing progress. Since the beginning of the pandemic, the number of small business startups has soared. Even though the pandemic crunched the economy, the number of small business startups jumped 24%.5
The number of startups is increasing, but the number of venture capital deals for smaller firms is shrinking and has been shrinking for some years now.
Will crowdfunding be the source of new capital for the small startups?
I believe it is possible; there could be a big jump in equity deals funded through crowdfunding that could have international reach and implications.
Crowdfunding raised just $880 million in 2010. By 2013, it had grown to $13 billion and in 2018, $84 billion. That $84 billion surpassed the total investments made by traditional venture capital. However, as much as 70% of crowdfunding was going into peer-to-peer lending. Very little has gone into equity financing of small companies. That is changing.
In 2020, crowdfunding raised just $239 million for equity funding. But that was up 77% from 2019, and by some estimates that number is expected to surpass $1.2 Billion by the end of 2022. Traditional venture capital, prior to 2021, was raising $1.7 to $2.2 billion for these smaller equity deals. If the trend continues, crowdfunding will surpass traditional venture capital by 2025.
What really kicked off traditional venture capital was the DEC investment by ARDC. Their $70,000 investment grew more than 500 fold to $38 million in nine years. If a few of the crowdfunding deals in small companies achieve similar returns, it is possible that crowdfunding will take off just as traditional venture capital did in the 1960s.
Venture capital gave a big boost to new and exciting young companies in the 1960s and 1970s. Many of those companies now dominate the DOW and the S&P 500. Will some of the crowdfunded companies of the 2020s have that impact in the world of commerce in two decades?
In my opinion, yes they probably will. That could well keep this secular bull market roaring for another ten years.
1. Strebulaev, Ilya A, and Will Gornall. “How Much Does Venture Capital Drive the U.S. Economy?” Stanford Graduate School of Business, October 21, 2015. https://www.gsb.stanford.edu/insights/how-much-does-venture-capital-drive-us-economy.
2. Teare, Gene. “The Q3 2021 Global Venture Capital Report: Record Funding Trend Held Strong.” Crunchbase News. Crunchbase News, October 5, 2021. https://news.crunchbase.com/news/q3-2021-global-venture-capital-report-record-funding-monthly-recap.
3. Teare, 2021.
4. Mathur, Priyamvada. “21 Charts Showing Current Trends in US Venture Capital.” News and Analysis. Pitchbook, July 24, 2019. https://pitchbook.com/news/articles/21-charts-showing-current-trends-in-us-venture-capital.
5. Djankov, Simeon, and Eva (Yiwen) Zhang. “Startups Boom in the United States during COVID-19.” Peterson Institute for International Economics , February 17, 2021. https://www.piie.com/blogs/realtime-economic-issues-watch/startups-boom-united-states-during-covid-19.