US Venture Capital & Principal Trading Market: Setting New Highs

Despite the ongoing pandemic, the Venture Capital (VC) and Principal Trading (PT) market in the US is thriving and recorded significant growth in 2021. An upward growth trend is expected to continue in 2022 as well. The growth projection for these markets for the next five years (2022-2027) stands at over 8 per cent year-on-year. It is the 25th ranked Finance and Insurance industry by market size. The year 2021 was a spectacular year for the American financial system and the venture capital ecosystem in particular, with VC investments, fundraising, and principal trading setting new highs.

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Venture Capital and Principal Trading

The VC is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. The venture capital and private equity industries are made up of firms and individuals who acquire and sell various assets for profit or invest in companies in the hopes of selling their share in the firm through an IPO or acquisition for a higher price. Affluent investors, investment banks, and other financial institutions are the most common venture capital sources.

Principal traders purchase and sell assets from their own accounts, providing a continuous source of liquidity and allowing for more orderly trading. They're taking a risk by carrying inventory on their dime. But, like any other market player, they're in it to make a profit, whether by careful timing of purchases and sales or by creating a two-sided market in the asset, in which they set different prices for purchasing and selling the same product and benefit from the spread between the two quotes.

Market Size

In 2021, the worldwide venture capital investment market was valued at US$ 211.3 billion. As per estimates of IMARC, the market is to reach US$ 584.4 Billion by 2027, exhibiting at a CAGR of 20.1% during 2022-2027. In the US, the market size, measured by revenue, of the Venture Capital & Principal Trading industry is $51.6 billion in 2022. It is expected to increase 3.4 per cent in 2022. From 2017 to 2022, the market grew at 8.4 per cent per year on average between 2017 and 2022.

Interestingly, The market size of the Venture Capital & Principal Trading industry in the US increased faster than the economy overall. The main growth driver of the market is the overall financial market performance. Traders profit from rising stock prices because they can sell their holdings for a better price than they paid. When stock markets are rising, venture capitalists earn more on their investments through higher-valued initial public offerings or sales to acquiring firms. Given an average business climate, the US Capital Market is expected to increase in the next five years, representing a potential opportunity for the VC and PT industry.

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Venture Capital Firms and Startups

In the US, the expanding investment activities in diverse industry verticals, such as financial services, healthcare, biotechnology, agriculture, and media and entertainment, also strengthen market growth. Moreover, to make better investment selections, venture capitalists use algorithms and machine learning (MI) to discover firms with higher growth potential. However, the market growth is significantly impacted by the global spread of the coronavirus disease (COVID-19) and consequent lockdowns or restrictions imposed by the government. Despite all challenges, the US startups raised $329.9 billion in venture investments in 2021, nearly doubling the previous annual record of $166.6 billion set in 2020.

The Road Ahead

The fund managers, VC firms, Angel investor, and startup investors would be looking forward to expanding their bases. The Venture Capital and Principal Trading Market in the US is expected to grow at 8 per cent and above in the next five years. The US VC firms raised a record-shattering $128.3 billion in 2021, representing a 47.5% YoY increase over 2020's fundraising figure of $86.9 billion. This positive and upward trend is expected to be more dominant in the next five years. Some VC firms and startup investors are now looking for opportunities in the valuation decrease due to some challenges posed by the pandemic. On the other hand, lower valuations are a double-edged sword for VCs; they want lower valuations for the initial investment but more excellent prices in following rounds (as previously purchased shares are marked up) and after exit.

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