The Trillion Dollar Question
more demand = more supply = more demand ... until no more.
Demand can only be served if there is Supply.
A market implodes when there is no more supply or when the supply were artificially created to please the demand for too long and can’t be absorbed anymore.
I’ve done some back of the enveloppe calculations based on quick searches this morning. My assumptions might be completely stupid… But I was wondering how much capital would venture capital backed companies need in the coming years to sustain their non-profitable growth rate.
I’ve only looked at the numbers in the US. They were easy to find and seem highly relevant in this market.
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In 2020, Seed Rounds in the US exceeded $7B;
During Q3 2020 only, 90 companies raised rounds beyond $100M;
More than 400 companies got listed in the US last year, raising approximately $140B;
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In the meantime, the non-profitable technology index published by Goldman Sachs jumped to the roof from 100 to 400 in 2020 only.
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Many tech companies must keep raising money to live (survive)
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Some back of the enveloppe calculations…
Extrapolating Q3 2020, there were 400 companies in 2020 that raised somewhere around 70B total in their venture-growth stage rounds beyond $100M, which is approximately 10x the amount raised by seed companies during the same period by roughly 1600 companies. During the same period, 450 companies went public in the US, raising a total of $140B.
Also, in 2020, a total of 10 000 VC-backed startups have raised around $150B in the US. It excludes tech IPOs.
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Making sense of those numbers…
Taking some rough assumptions about dilution and revenue multiples…
Seed deals were valued at a total of $50B in 2020, Venture-Growth stage deals at about $700B and newly listed tech companies at about $2000B, we’re talking about $3000B of value creation combined. 3 TRILLION.
If we take into account that those companies raise at average revenue multiples of 100x for seed deals (who cares really…), 30x for venture growth stage deals and 20x for listed tech companies, those companies must have generated around $124B in revenue in 2020.
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Is this real ?
My first question is… Did those companies really generate more than $100B in revenue. If not, it raises a frightening question around the artificial value created by the market.
Can we sustain this pace ?
A fair amount of those companies are still burning quite a lot of cash and will need to be capitalised again, including the listed ones.
If their revenues increase by 50% within the next 12 to 18 months, reaching about $200B and they decide to raise on a 20x multiple for 5-7% of dilution, they will need an additional $200-250B, on top of the $150B already needed by the rest of the venture capital market and the $100B to $200B needed by newly listed tech companies.
Can the market absorb a cash requirement of $400B to $600B for all those US tech companies ? This is my trillion dollar question !
That's a *very* insightful post, thank you for sharing it.
If the answer is "no", it means that a big part of that artificial value created will soon be reduced to ashes. If the answer is "yes", then it's only a matter of time for it to become a "no".
The important question after that is "does it really matter at a global scale?". The risk does not seem systemic, so the losers will only be the ones who dared to play: entrepreneurs and VCs. No big deal: they play that game specifically because the enjoy the risky part of the (ad)venture.
At the ecosystem level, it will eventually cause a violent paradigm shift, but here again: it's the healthy cycle of the innovation funding process, as described by William Janeway.
I'm not pretending to understand everything here, so please correct me if I'm wrong.