Three Sectors with Strong Post-COVID Recoveries in Valuations and Financials
In the years since the peak of the pandemic, venture capital has been a bit of a mixed bag. 2021-22 were record years for the asset class. However, 2023 and the first half of 2024, have been marked by headwinds as a result of inflation, higher cost of capital, and softening business conditions. Still, there have been some sectors that have been relatively immune to this uncertainty.
Three sectors - information technology (IT), business and financial services, and health care have all had elevated venture capital investment since 2021 and continue to dominate now, in a slower venture capital environment.
Information technology This is a broad category that includes a lot of different types of companies, software, and services. That diversification has been beneficial for sponsors and investors. Software startups, specifically, are driving big investments in this category. According to data from EY, software startups gathered $74 billion of the $94 billion invested in IT during 2021's record year for venture capital. IT companies have largely maintained this rate of investment although in 2024, that likely means a flat round rather than an increase.
Market intelligence company AlphaSense, for example, closed a $650 million series F round in June, bringing the company's valuation to $4 billion. The company was valued at $2.5 billion in 2023. Investors including BDT & MSD Partners, Viking Global Investors, CapitalG, Goldman Sachs, Alkeon Capital Management all participated in the round. AlphaSense generated $200 million in revenue and a 79.2% CAGR in 2023.
Business and financial services Like IT, business and financial services startups are a diverse group which can insulate them from some economic headwinds. Companies in this space can also provide essential services, which typically means that their customer base is stickier than other industries.
Stripe, for example, is a leader in this space and had a $694 million series I round led by Sequoia in April. This was a notable fundraise given the stress in sectors like consumer, where Stripe can be used as a payments processor. Over the past decade, Stripe has emerged as a prominent player in the digital payments landscape, competing with established giants like PayPal, Square, and Adyen. The company has a current valuation of $70 billion up from a $50 billion valuation a year ago, and has successfully completed 15 funding rounds. The company generated $18 billion in revenue in 2023, with a one year CAGR of 25%. This represents a rebound in Stripe’s overall valuation. In 2021, the company raised a $600 million Series H round that raised it to a $95 billion valuation, but that valuation fell when venture capital financing dropped off as the cost of capital rose abruptly in 2022.
Payments startups overall, drew $2.2 billion in funding globally during the second quarter, according to data from CB Insights - this marks a high point for second-quarter funding this year and for the same period in 2023.
At the smaller end of the market, TPG recently acquired Sayari Labs, a company in this category that manages supply chain risk. The $228 million dollar deal was done through TPG Growth, highlighting how these companies can become key targets for financial sponsors very early in their trajectory. Prior to its acquisition, Sayari was backed by Lavrock Ventures, In-Q-Tel, Centana Growth Partners, Arsenal Growth and MissionOG. The company generated $104 million in revenue in 2023 with a 67.4% CAGR. It was previously valued at $150 million in 2021.
Health care Digital health startups raised $5.7 billion across 266 deals in the first half of 2024, according to data from Rock Health - a strong showing in a year where venture activity has slowed. Much of that fundraising has been dominated by elevated late stage rounds and if activity continues at this pace the sector would be in-line with historical norms.
As with business and financial services, transactions are happening at all stages and company sizes. The second quarter saw mega deals including Sanofi's acquisition of clinical-stage biotech company Inhibrx for $2.2 billion in May.
Valar Labs, a company that supports cancer treatments with artificial intelligence, also raised $22 million in early stage funding in a round led by Andreessen Horowitz, Pear VC, and DCVC. Andreessen Horowitz first invested $4 million in the company in 2022. PrivCo data has the company at a $75 million valuation up from a $10 million valuation at the time of the seed round. Valar Labs generated $3.56 million in revenue in 2023 and had a 109.4% CAGR.
Curves ahead Venture capital funding slowed in the first half, with many companies having flat or down rounds as high interest rates persisted longer than some initially thought. Analysts suggest venture capital managers may be taking a wait and see approach - if the Fed cuts rates in the second half of the year they could be more inclined to do deals on a relatively cheaper basis.
In the meantime, companies that have been successful at fundraising and improving their valuations are either already profitable - in the case of large mature companies like Stripe or AlphaSense. Or, they have a clear pathway to profitability which makes them strong targets like Sayari or Valar Labs. All three sectors - IT, business and financial services, and healthcare have companies that fit these trends which have helped them remain resilient while other parts of the venture capital universe have faced challenges.