Venture capital (VC) and private equity (PE) investments are commonly taught in investment courses as Stage 1 and Stage 2 of the investment cycle. VC investing is seen as pre-profit investing and PE investing as the follow-on step that helps take – or return – a company to profitability. Additionally, VC is characterized as the earliest stage of PE investment. If this relationship holds true, an increase in VC investments in a given year, especially in tech companies, could logically indicate future growth in PE investments. Therefore, VC investment is a leading indicator of PE investment.
This assumption might be further justified by the growing prominence of buyouts of VC-backed companies in recent years, particularly in the software space. In 2017, 17.9 percent of PE deals were in the information technology industry, which is a substantial increase from 13.3 percent in 2015. Over the past few years, Vista Equity, Thoma Bravo, Warburg Pincus and several other software-focused private equity firms have increasingly initiated M&A discussions and acquired VC-backed software companies. Not only has PE been making more investments into VC overall, the percent of PE deals that came from VC has increased significantly. In 2020, PE firms participated in more than 800 VC to PE buyouts worth a combined $48.3 billion in the U.S., the highest annual total on record (compared to an annual average size of $60 million). Notably, the $48.3 billion investment in 202...