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A bridge to liquidity for tech startups

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Between 2003 and 2021, private market fundraising worldwide has increased more than twelvefold, from around $96 billion to around $1.2 trillion. In 2021, venture capital and growth capital accounted for almost half (47%) of private equity fundraising. All this venture capital activity has led to a meteoric rise in the number of seed rounds in early-stage companies and, consequently, in the number of companies reaching unicorn or decacorn status. The United States alone minted 340 unicorns in 2021, more than in the previous five years combined. As a result, more and more wealth is accumulating in private companies.

The unprecedented growth in venture capital investments has also been visible in Europe. In 2021, capital invested in technology companies in Europe has reached a peak to more than 120 billion dollars, three times more than the previous year and four and a half times more than in 2017. There are now more than 350 venture capital funds active in Europe.

A very interesting case showing the rapid growth of technology ecosystems in specific regions is that of Israel. More than two decades ago, the country made a concerted effort to focus on the knowledge economy and technology. A boom in venture capital funds and startup accelerators followed, and as more investment players came on board, more startups took off. Today, the Israeli technological ecosystem is getting closer 28 times more venture capital per capita against the United States and ranks third in the world by the number of start-ups. In 2021 alone, investors engaged $26 billion for the Israeli ecosystem, a jump of almost 150% compared to 2020, which fueled 75 IPOs and the creation of more than 40 new unicorns.

Yet Israel, although probably the most important of the regional ecosystems, is not alone. The CEE countries show similar development patterns to Israel, albeit a decade later. The first successes gave birth to regional hubs, like the success of Skype which fueled start-up activity in the Baltic countries. Today, the region, while still underserved compared to its Western counterparts (or Israel), is a thriving market for technology investors. In 2021, venture capital investment in CEE was on track to reach $5.4 billion, a 2.3x increase from 2019.

Yet the wealth accumulated in private technology companies also creates pressures on their shares. Venture capital funds are typically structured as funds with a fixed lifespan (typically 4-5 years investment period, followed by 4-5 years execution period). At the end of the fund’s life, venture capital firms must return the capital to their investors, the limited partners. Yet even though the lifespan of venture capital funds has remained more or less the same over the past decades, the investment horizons of private companies have expanded significantly.

In 1999, companies went public an average of four and a half years after founding, but by 2020 that figure had declined. almost tripled over twelve years old. This extended exit horizon means investments remain illiquid for longer, which can put pressure on venture capital firms whose funds are nearing the end of their lifespan. This trend is unlikely to reverse due to recent macroeconomic challenges and uncertainties, as well as declining global technology valuations and increased volatility in public markets. By the third quarter of 2022, global IPO Volumes and their revenues fell year-over-year by 44% and 57%, respectively.

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