February 5, 2020

Low interest rates, pent-up demand for growth, and major advances in IT infrastructure have made it easier for software companies to start up and scale. As Marc Andreessen predicted, software has eaten the world, gobbling up a massive share of private and public markets alike, and generating strong performance for investors in the process.

As a result, the last decade has been very good to the venture capital (VC) industry. Venture-backed software and internet companies now account for seven of the 10 largest companies in the world. Returns have improved markedly over the prior decade and are now largely outperforming buyouts. Investments and exits are at all-time highs. Can it last?

We tend to think so. Despite the excesses of the tech market and the parallels to the dot-com bubble, risk-reward in VC has actually improved. We believe the rise of software and SaaS as a business model explain why: They have offered high margins, recurring revenues, and opportunities to apply artificial intelligence to monetize data. There are also more investment strategies than ever for LPs to consider.

We expect software to continue penetrating other sectors of the economy. This growth opportunity and the resiliency of the SaaS business model should enable VC to outperform, powering the IPO, M&A, and buyout markets in the process.

The VC Boom

A decade of expansion in VC has led to a number of recent milestones, including a record amount of capital invested in VC-backed companies in 2018 and a record amount of liquidity in 2019. It has clearly been a golden era for VC. As seen in the below, 2018 was a banner year, and that momentum largely continued into 2019. The IPOs of high-profile companies Uber, Zoom, Slack, Pinterest, and Lyft led the way for what was a record year for exit value. This is certainly a welcome development for the LPs that have waited a decade or more to realize these gains and have been constrained in their ability to commit more capital to the asset class.

More VC Insights

John Coelho and Brian Borton provide an overview of trends in venture capital and growth equity, discussing some of the risks and merits of this increasingly global asset class.

Download the full paper here