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Capital Climb: Nationwide venture capital funding reaches record level in 2020

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While the coronavirus pandemic tightly squeezed the U.S. economy last year in the employment and supply chains sectors, venture capital investing hit record highs.

Nearly 11,000 venture-backed companies received $164 billion in funding last year, a roughly 17% increase from $139.5 billion in 2019, according to a report from industry trade group National Venture Capital Association. It marks the third consecutive year that more than $130 billion has been invested, said Michael Chow, research director with Washington D.C.-based NVCA.

“It was a phenomenal year, all things considered,” he said. “If you rule out the pandemic and the anticipation that it might have been a more troubled year for the venture capital industry, if you were forecasting from quarter two of 2020, even then the industry performed phenomenally.”

Although NVCA data didn’t break down investment totals in the Springfield area, Missouri recorded roughly $41 million in capital investments last year. Chow said as in recent years, the largest portion of venture capital in 2020 was raised in California, Massachusetts and New York. The three states combined last year for over $61 billion raised. 

“It seems like venture has maybe reached kind of a turning point,” Chow said. “It’s not what it was even five or 10 years ago when the levels of investment were considerably smaller.”

According to NVCA data, investment amounts have doubled since 2016, when companies received roughly $81 billion in funding.

Chow said venture capital investors are enthusiastic about the industry’s growth potential, which has been less volatile than the stock market in recent years. That’s even coming out of a year dominated by the pandemic and a recession.

“There’s a recognition that even in down times for the economy as a whole there are a number of really good investments that can be made in the early stage during a recession,” he said, noting investors have become savvier in the years since the Great Recession.

Technology companies are the most common to receive such funding. Investors committed $52 billion to software startups in 2020, up from $45 billion in 2019, according to NVCA data. That was followed by biotechnical and pharmaceutical companies with $28 billion invested.

Venture capital investors provide capital to companies showing high growth potential in exchange for an equity stake. That includes funding startup ventures or supporting small businesses wishing to expand that don’t have access to equity markets.

Another round
The pandemic initially was a deterrent to conduct a third round of capital raising for Springfield-based Alliance Capital Investors LLC, a startup real estate investment company launched in 2019. Chief Financial Officer Tyler Creach said the first two rounds raised nearly $6 million combined. The second round was completed in January 2020.

“We kind of planned to pause and not do it,” he said. “But then as the year went on and summer progressed, having conversations with a lot of our current investors, they kept reaching out and saying they’re interested in doing more of this.”

The third round, which wrapped in January, raised $3.2 million.

“It was more than what we expected, actually. Each round we’ve done, we’ve raised more than the previous round,” Creach said. “People are getting more and more comfortable with it.”

Creach previously told Springfield Business Journal ACI was started as a long-term succession plan with one of its goals to transition the holdings of Jared Enterprises, a family-owned real estate holding company, to one with a more diverse ownership group. Jared family members are among ACI investors.

ACI has 59 investors and the company’s real estate portfolio value is roughly $38 million, Creach said. The third-round capital raise resulted in the purchase of Lebanon Marketplace from Jared Enterprises for an undisclosed price.

Planting seeds
The Efactory, Missouri State University’s business incubator, has funded investment to 17 startups since 2016 through its accelerator program. Paige Oxendine, Efactory assistant director, said $510,000 has been invested among the companies through the Springfield Innovation Inc. board, which manages the seed capital fund. As part of the accelerator program, businesses receive $30,000 in seed money in exchange for 8% equity in their companies. The accelerator also offers mentorship, office spaces, networking and additional funding opportunities.

This year marks a second attempt at the program’s fifth cohort, as 2020’s was canceled amid the pandemic. Oxendine said the application review process is underway, with a July 19 planned start. The program will include 18 weeks of programming and support, with much of the expert-led curriculum to be available on demand for the first time, she said, adding a mix of in-person and virtual learning opportunities will be provided.

“Since launching in 2016, our accelerator program continues to be the only accelerator program in the region,” Oxendine said via email. “The value that this brings to early-stage companies is tremendous and plays a significant role in our efforts to help entrepreneurs start and grow businesses in southwest Missouri. The seed capital fund provides the capital investment component of the accelerator program and therefore the program would not exist in its current form without the fund.”

Oxendine said since the Efactory opened in 2013, its programs have served over 2,260 businesses and assisted with the creation of more than 2,000 jobs. Those companies have secured more than $96 million in venture capital and equity during that period.

Growth extension
On the national landscape, capital raising is showing no signs of slowing down. Roughly $69 billion in venture capital was invested nationally in the first quarter of 2021 – nearly doubling the $35.8 billion invested in the same period a year ago, according to NVCA data.

Chow said he doesn’t foresee the investment growth staying at such a rapid pace throughout the year but added another record year could be in store.

“The expectation is that the industry is going to continue to go from strength to strength,” Chow said. “The risk taking is still shrewd and prudent. Even though we see this large uptick in investments made, it’s still justified.”

ACI’s Creach certainly hopes so. The company has an ambitious plan to raise capital this summer. He’ll be working in the next couple of weeks with attorneys to put the offering documents together for a round of raising capital July through October.

“We’re going to shoot to raise money over this summer and fall to buy Brentwood North,” he said, noting ACI already owns the Brentwood Center South shopping center on Glenstone Avenue. “That property is still in the Jared family portfolio. It’s one that we think would be a great addition to ACI’s portfolio.”

While he hasn’t calculated the formal valuation of Brentwood North, he expects ACI will need to raise around $7.5 million for the shopping center.

Creach believes the goal can be accomplished, noting there’s a big pool of new venture capitalists wanting to get involved with ACI. Additionally, interest rates are hovering in the 3%-3.5% range, even for up to 10-year deals, he said.

“We really think people are ready,” he said. “If we can get this deal done by the end of the year, we can lock in 10-year money at crazy low interest rates, which just makes the return to the investors even better.”

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