The United States has the world’s largest VCF market with more than US$156 billion in funds. This compares to China (US$84 billion), United Kingdom (US$10.8 billion), Japan (US$1.66 billion), and Australia (US$1.16 billion). VCF funding emerged in the US during the 1940s, become established in the 1980s, and matured in the 1990s.
As mentioned earlier, the emergence of technology start-ups in America between 1980 and 1999 led to the development of the Silicon Valley business model. This business model was dependent on VCF investment to help the ISF venture navigate the challenges of early-stage commercialisation prior to IPO.
However, the digital transformation that produced firms like Apple and Microsoft, also saw a rise in financial speculation, that led to the dot.com investment bubble, which crashed in 2000, impacting the VCF sector. Research by the Kauffman Foundation, into 88 VCF funds from 1990 to 2010, found that 78% failed to deliver sufficient returns to justify any patient, long-term investing.
America’s VCF market remained in the doldrums until the Global Financial Crisis (GFC) of 2007-2008. Responding to this challenge, the Obama Administration passed the Jumpstart Our Business Startups Act of 2012 (JOBS Act). This was designed to help bridge the gap between early-stage investment and IPO for ISFs, such as medtech and biotech.
The JOBS Act helped to revive the US venture capital sector, boosting growth in VCF deals. There was a significant rise in investments into high-risk biomedical start-ups, and a massive capital raising for high-growth digital online ventures (e.g., Airbnb, Lyft, and Uber). These start-ups with market values of more than $1 billion were labelled “Unicorns”, to reflect their rarity.
During this period, the US VCF sector changed. A few mega funds emerged, boosted by the JOBS Act. A financial ecosystem formed comprising Angel investors, business accelerators (e.g., YCombinator), digital crowd funding platforms (e.g., Kickstarter, Indiegogo), early-stage seed funds, and cryptocurrency funds.
Although exciting, this ecosystem raised concerns among academic researchers. They suggested the Unicorns represented little more than a speculative investment bubble. At its core were multi-billion-dollar unlisted start-ups, funded by private equity (PE), which reported no profit, and were overvalued. If the flow of VCF investment into such firms slowed or reversed, most of these firms were unlikely to survive.
The COVID-19 pandemic of 2020 also affected VCF funding. Prior to the pandemic there has been a record growth rate of 13% in VCF fund raising in the United States. However, during 2020 early-stage, seed, and angel VCF deals declined by 20%, and overall fund raising by 11%. During 2021, the sector returned to growth, a pattern that mirrored the activity across about half the world’s economies over the same period.
Another trend in US VCF funding since the 1990s is a significant decline (47%) in IPOs of ISF ventures. PE deals have become an alternative to IPOs, with large VCF retail funds moving into the segment. What is driving this trend is unclear, although the unusual nature of the US VCF market discussed earlier is likely to be playing a part. IPO listing requires a significant transparency in assessing and reporting a firm’s market valuation than is the case in PE deals. This trend has also been attributed to changing tax codes, laws and regulations that favour PE deals.