2021 Year in Review for Southern California Tech
One year ago, after the ups and downs of the first year of the COVID pandemic, I ended my 2020 Year in Review with some misgivings. Southern California’s tech startup ecosystem showed resilience during last year, but it didn’t seem to be growing at the same rate as other cities that were benefiting from the Bay Area exodus. To prove sustainable growth, I noted that the region “needs to find a way to increase its pace of unicorn formation, especially outside of the consumer sector. More importantly it needs to generate more than the one or two major exits per year that it has steadily realized over the past decade.”
The community answered back strongly, and 2021 was a blockbuster year for the region by any metric. More local companies achieved the $1B valuation milestone in 2021 than in the previous three years combined, and 70% of those new unicorns were Enterprise focused companies. Exits for the region smashed records as well. Overall, 2021 seems to have proved that Southern California is capable of a much higher level of consistent value creation than it has previously demonstrated.
Record Unicorn Creation
This year, 20 Southern California startups achieved unicorn status by being valued at $1B or more in a private financing round. This is the highest year on record, up from 7 companies last year and only 4 in 2019.
Most importantly, of the 20 new SoCal unicorns, 14 were Enterprise and B2B-focused businesses. As I’ve highlighted previously, Enterprise startups tend to generate more consistent exit outcomes than Consumer-oriented startups. This means more success stories and higher turnover of both talent and capital within the ecosystem, breeding further success.
Of extra importance for the region, the diversity of this cohort of new Enterprise unicorns helps dispel the notion that Southern California entrepreneurs focus too much on the Advertising and Media sectors. While those categories certainly appear on the list, there are also strong showings for sectors such as Fintech (Sunbit, ReCharge, FloQast), and Aerospace & Defense (ABL Space Systems, Shield AI). The strength in A&D is particularly interesting because it shows that the region has been able to leverage its competitive advantage as the leading A&D hub of the 20th Century and maintain momentum from last year, when Anduril and Relativity Space achieved unicorn status.
The two cybersecurity entrants to this year’s unicorn list also demonstrate the frenzied pace of fundraising in 2021. San Diego’s Drata, a provider of SOC 2 compliance automation, catapulted from initial product launch to unicorn status in less than a year. Orca Security, with headquarters split between Tel Aviv and Los Angeles, is locked in a tight race against Israel’s Wiz and Silicon Valley’s Lacework for control of the nascent cloud security posture management market. In the process, Orca raised over $550m within the year, a massive war chest for a relatively young company. The fundraises for both Drata and Orca see them join the growing ranks of Southern California cybersecurity success stories such as CrowdStrike, Cylance, and Signal Sciences that have done much to help foster the local ecosystem.
Record Exits
2021 was also a banner year for exits for Southern California startups. According to Pitchbook, venture-backed companies in the region saw $135B of announced exit value via IPOs, de-SPACs, and acquisitions in 2021. 19 of these exits were at valuations of $1B or higher (14 excluding Life Sciences companies). For comparison, the region saw $161B of announced exit value in total from 2010 through 2020. The pace of exits for investors in the region has never been higher.
The theme of exits in Southern California for 2021 was mobility. Notable IPOs and SPACs for the year included new auto OEMs Rivian, Faraday Future, and Xos Trucks, autonomy provider TuSimple, and scooter sharing leader Bird. Together these five companies accounted for 62% of announced exit value in Southern California in 2021.
The company that must be highlighted here is Rivian. Valued at $67B at the time of its IPO, it alone represented fully half of the $135B of announced exits in Southern California in 2021. This demonstrates just how strong the “power laws” are for value creation in startups — a small portion of companies will generate a disproportionate amount of total returns, particularly in Consumer-facing sectors.
In fact, Rivian generated 77% of all the exit value for Southern California B2C companies in 2021. Without Rivian, B2B and Enterprise companies would have taken the lead in total announced exit value, at $32B, compared to $20B for B2C and Consumer companies. The Life Sciences sector, including categories such as biotech and medical devices, realized an additional $15B in announced exit value for the year.
Looking ahead, if 2021 was the year of mobility exits, 2022 is gearing up to be the year of fintech exits, with local companies Dave, Aspiration, and Acorns all on deck to list publicly through SPAC transactions that were announced in the middle of the year. And while 2021 was relatively light on large Enterprise SaaS exits (Procore and ZipRecruiter IPOs being the notable exceptions), the recent large SaaS fundings show that the region is ramping up for a more reliable stream of successes in that sector.
Caution Ahead
While both the fundraising and exit environments were strong for Southern California startups in 2021, there are several reasons to expect that the next year might be more challenging than the last.
In 2021, over $17B of exit value in Southern California came from SPAC transactions, making them the second largest source of exit value after IPOs. SPACs were the exit path of choice for local companies including Rocket Lab, Science 37, Bird, Faraday Future, and Xos Trucks. Unfortunately, technology SPACs as a whole have not performed well. Of the five companies listed previously, only Rocket Lab and Science 37 are trading above their SPAC offering price (typically $10). This underperformance means that we might see a pullback in new SPAC formation and capital available for these transactions.
2022 will also present the moment of truth for this year’s IPO star, Rivian. The company is just now beginning deliveries of its highly-anticipated R1T truck and R1S SUV, so 2022 will be the year that tests the company’s ability to produce vehicles at scale and generate meaningful revenues. This will continue to test public investors’ willingness to pay high prices despite significant ongoing execution risk.
While Rivian and much of the 2021 SPAC cohort represent the risk inherent in “deep tech” companies, there has been some emerging shakiness in valuation multiples for the much more stable SaaS sector as well. The Bessemer Venture Partners Nasdaq Emerging Cloud Index is down almost 3% for the year, compared to an almost 29% return for the S&P 500. Much of this underperformance has come in the past 3 months, with the Emerging Cloud Index shedding almost 9% as EV/NTM multiples have contracted for the sector. As interest rates are expected to increase next year, these companies will test public markets investors’ current willingness to pay for growth rather than profitability.
Despite some emerging concerns on potential exit valuations, the fundraising environment for private companies should remain strong through 2022. Pitchbook estimates that venture firms raised a record $96B in fresh capital in 2021 and are consequently sitting on record amounts of “dry powder” to deploy into new investments. In addition, we are still seeing record levels of involvement in startup financings from non-traditional investors such as crossover hedge funds and corporates. As long as this capital is available, we can continue to expect a frenzied pace of investment in startups, with Southern California entrepreneurs earning their share.
