Robust Growth in Venture Capital – Federal Policies Threaten Positive Momentum

By SBE Council at 13 April, 2022, 9:00 am

by Raymond J. Keating –

The latest Pitchbook-NVCA report on venture capital served up some good news. Specifically, venture capital investment in 2021 nearly doubled from where it was in 2020.

Venture capital investment, after growing by 13.3 percent in 2020, jumped by 98 percent in 2021 – from $144.5 billion in 2019 to $166.6 billion in 2020 and $329.9 billion in 2021.

As explained in the report:

“US VC-backed companies raised $329.6 billion in 2021, nearly double the previous record of $166.6 billion raised in 2020. Investment activity (measured in both total dollars invested and total deal count) for seed & angel, early-, and late-stage companies all hit records, as did investment activity for companies receiving their first equity round of institutional financing and companies raising VC mega-rounds (sized $100 million or more). Total deal count also increased substantially to an estimated 17,054 deals in 2021 (up from 12,173 in 2020), but the increase in deal count did not match the pace of the surge in additional capital, continuing the trend of increasing deal sizes.”

Given the troubles that the U.S. has experienced in recent times regarding the level of entrepreneurship, it was particularly heartening to see strong growth in angel and seed activity. (See the following chart from the Pitchbook-NVCA report.)

The same goes for early-stage venture capital investment, which jumped markedly in 2021 (as noted the following Pitchbook-NVCA chart).

Finally, it is worth noting the jump in the venture capital exit market. In terms of the number and value of exit deals, the growth was dramatic (once more, see the following Pitchbook-NVCA chart).

After digesting these and other venture capital data, let’s turn to policymaking.

First, the Biden White House and various members of Congress are looking to increase the capital gains tax. But that would reduce the incentives and resources available for investing in new and growing companies, thereby undermining entrepreneurship and our economy.

Second, again, the Biden White House and assorted Members of Congress support restricting the ability of large companies – so-called “Big Tech” in particular – to acquire smaller, entrepreneurial firms. It must be understood that venture capital investors need to know that they will be able to exit their investments, and therefore, restricting merger and acquisition activity means disincentivizing venture capital investment in the first place.

As always, when politicians posture against “big business” and “the wealthy” many of the consequences tend to hit small businesses, as well as their employees and customers, hardest. If we want to see robust entrepreneurship in the U.S. – and we do – then policymakers need to be clear on the full implications of the policies that they put forth.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.