Venture capital continues to exhibit immunity to the COVID-19 pandemic

The term “unprecedented times” has been repeated frequently since the start of the pandemic, but we’ve never seen a bull market like this in VC investment before.

Executive summary

• All signs point to another major year of investment for 2022, though it’s likely to fall short of the phenomenal 2021 results given the sheer scale of the numbers.
• Mega-rounds mostly comprising late stage deals now represent 60% of all VC raised. This trend has been on the upswing for several years now.
• Consumer services saw a strong comeback from the pandemic-inspired lockdowns of 2020. Retailers raised almost twice as much in 2021 as they did in 2020.

The venture capital (VC) market roared past the $300 billion plateau in Q4 2021, offering more proof that it really is immune to the adverse economic impacts of COVID-19. The numbers we are seeing now are truly staggering. The top two years ever of venture investment have come during the pandemic. The $307 billion invested in venture-backed startups in 2021 almost doubled the previous year’s record, bringing the total invested to nearly $750 billion over the past four years.

The term “unprecedented times” has been repeated frequently since the start of the pandemic, but we’ve never seen a bull market like this in VC investment before. All signs point to another major year of investment for 2022, though it’s likely to fall short of the phenomenal 2021 results given the sheer scale of the numbers.

From a stage perspective

Later stage deals are up significantly year over year, from $59 billion in 2020 to more than $135 billion in 2021. Series A and Series B were also up year over year, with both more than doubling what we saw in 2020.

Mega-rounds were indeed “mega” this quarter

Mega-round financing continues to grow significantly, with 843 deals surpassing $100 million. We also saw 17 rounds raising $1 billion or more last year. Mega-rounds mostly comprising late stage deals now represent 60% of all VC raised. This trend has been on the upswing for several years now.

Top three sectors continue to dominate

The same three sectors — information technology (IT), business and financial services, and health care — continued to dominate overall VC activity. We were surprised last year to see business and financial services emerge into second place ahead of health care, which benefited from an investment surge in response to COVID-19.

We don’t see any sector overtaking IT anytime soon. Driven by the huge growth in software startups, IT recorded as much activity as the entire country did in 2017, which reflects just how significantly software startups have fueled growth in the industry. Software startups accounted for $74 billion of the $94 billion invested in IT in 2021 and $23 billion of the $29 billion in Q4.

An increasing demand for innovation in FinTech, which includes direct-to-consumer payment services, blockchain and cryptocurrencies as well as new technology tools aimed at supporting insurance (InsurTech) and real estate property management companies (PropTech), propelled business and financial services into second place. Overall, investment activity in financial services nearly tripled in 2021, from $17 billion in 2020 to $47 billion last year.

While health care slipped to third, this sector continued to be active as health care services emerged from the shadow of biopharmaceutical firms, due largely to the growing popularity of health-related applications spurred by the telehealth revolution at the beginning of the pandemic. A wide range of health applications that speak to the mental and physical well-being of patients, along with new research and streamlined access to appointment booking, are now readily available across the market.

While consumer services lagged behind the top three sectors, this sector experienced a strong comeback from the pandemic-inspired lockdowns of 2020. Retailers raised $11 billion in 2021, compared with just $4 billion in 2020. In addition, assets with a focus on direct consumer access, such as media and content and consumer information services, are thriving as more tech-enabled retailers are emerging, particularly those with more agile operations.

In the consumer goods sector, the flood of protein replacement products that have come to market, from plant-based foods to milk substitutes, drove much of the growth. As a whole, food and beverage companies raised $6 billion in capital last year, almost double the performance of 2020.

Regional activity

The top three regions over the past several years – San Francisco, New York and Boston – continued to lead the way in 2021, accounting for nearly 70% of the total VC activity in Q4. The San Francisco Bay Area, which includes Silicon Valley, recorded more VC activity last year than we saw in all of 2000, which was the height of the dot-com era. In addition, the San Francisco Bay Area nearly doubled what it raised in 2020, breaking the $100 billion barrier for the first time. Half of the top 10 deals nationally from 2021 were based in the Bay Area, driven largely by IT. Overall, the IT sector accounted for $46 billion in activity, which more than doubled last year. Business and financial services followed with $30 billion, while health care ranked third at $16 billion.

In 2021, New York pulled away from Boston to emerge as the second largest hub for VC activity in the US. New York had a monster year in both deal and dollar volume, recording $53 billion, over 2.5 times last year’s total. Financial services led the way, followed by software and health care services. On a quarterly basis, the New York area was up 7% and raised $15 billion in Q4.

Boston recorded $35 billion in VC activity, largely driven by health care, IT and consumer services. Boston also doubled the amount from 2020 and finished the year up nearly 33% quarter over quarter.

Among other cities, Los Angeles also enjoyed significant year-over-year growth from 2020, recording nearly $15 billion in venture-backed funding last year. The growth was largely in business and financial services, consumer services, and industrial goods and materials, which was fueled by large aerospace deals.

What does 2022 have in store for us?

While we expect to see continued strength in the VC market, it’s unlikely that we will see the market continue to grow at the rates we saw in 2021. A record amount of dry capital entered the market last year, but we are starting to hear rumblings over inflation, increased public market volatility and potential geopolitical concerns that could provide cover for a moderation of investment activity.

Of course, projections for the future always carry some risk. Last year, I was correct when I said we were poised to continue our bull run in 2021. However, two years ago I didn’t think the VC market would break $100 billion.

Still, with $300 billion-plus invested, we are truly testing the limits of gravity. Even if we saw a pullback of 10% or 15% next quarter, that would still represent the largest quarterly investment before the pandemic. Regardless of what happens, most likely we will still see significant capital flows that would have been thought of as impossible four or five years ago.

I don’t think it’s realistic to expect continued double- or triple-digit growth in venture funding and we should not be surprised, or alarmed, if we have a down quarter or year. Right now, we are still in a pretty exuberant mode — we’ve been exposed to COVID-19 and continue to see record activity. Unless something even more drastic occurs with the variant, I don’t anticipate VCs hitting the pause button any time soon.

The views expressed by the author are not necessarily those of Ernst & Young LLP or other members of the global EY organization. Numbers included are from EY analysis and based on Crunchbase data unless noted otherwise.

*We include equity financings into VC-backed companies headquartered in the US. Sources of cash investments include, but are not limited to, VC firms, corporate investors, other private equity firms and individuals.