Venture capital firms are on a roll.
Some 259 U.S. venture capital funds amassed $46.3 billion in 2019, the second highest by amount of capital raised and number of funds since 2006, according to the PitchBook-NVCA Venture Monitor. The biggest fundraising year since 2006 was 2018, when 299 venture capital funds raised $58 billion.
With all of that capital rushing in, some venture firms are on the hunt for the next unicorn, a company with a valuation of $1 billion or more. But are these mythical creatures really worth that much, or is it more a matter of the money surge artificially inflating values, while also sending more fees to managers?
According to the PitchBook-NVCA report released Jan. 14, there were 237 megadeals in 2019, transactions worth $100 million or more, that were valued at a combined $59.5 billion, fewer than in 2018 but the second highest on record.
Higher valuations can be good news for early investors in a company — as long as their stake maintains its weight. Later-stage investors might not even see their full investment returned if they bought in at too high of a valuation.
But one doesn't have to look far to see the risk. Perhaps the best example is that of WeWork Cos. Inc., whose pre-IPO valuation slid when it attempted to go public compared with its valuation after its last round of venture capital.
So much for that unicorn living up to its promise of a wealthy outcome.
For institutional investors, now might be a time to be cautious rather than chasing returns.