3 min read.Updated: 16 Jan 2021, 02:29 PM ISTSara Castellanos, The Wall Street Journal
US internet sector landed some $15 billion in funding in the fourth quarter, spurred in part by pandemic’s impact on digital-focused initiatives
Startups that sell critical cloud-based business software proved to be among the winners of 2020’s venture-capital deals.
U.S.-based companies offering services over the internet, including startups selling software tools and services for artificial intelligence and cybersecurity, as well as e-commerce providers, closed on $15.3 billion in funding across 687 financing deals in the fourth quarter of 2020.
The funding total is more than 50% higher than the same period in 2019, when the internet sector landed $10 billion in funding across 574 deals, and was the highest quarterly funding for the sector since 2011, according to a report released Jan. 13 by consulting services firm PricewaterhouseCoopers LLP and market intelligence firm CB Insights.
Health care took the No. 2 spot in deal count and funding amount in the fourth quarter of last year, with 244 deals and $8.5 billion in financing, according to the PwC/CB Insights MoneyTree Report.
“We’ve never seen so much disruption," said Tim McAdam, general partner at venture-capital firm TCV. “Software truly is managing every functional aspect of a typical business these days," he added.
TCV led a $300 million investment in technology startup OneTrust LLC, which sells privacy, security and data governance software. The deal was announced last December.
Founded in 2016, OneTrust is the fastest-growing software company to reach more than $150 million in annual recurring revenue in TCV’s portfolio, said Mr. McAdam. Its growth, along with that of many cloud security companies, was partly driven by the increased focus on security and privacy as employees work from home during the pandemic.
Experts say last quarter’s record funding for the internet sector is attributed to the convergence of several factors.
The pandemic has accelerated the already growing need for digital-focused initiatives, which has been a boon for startups focused on solving technology problems for companies. Cloud-computing startups, for example, have landed new investments and customer accounts during the coronavirus pandemic as many companies have accelerated cloud-related projects to keep ahead of the competition.
Venture-capital firms also have had to spend the capital they have amassed in megafunds. Venture funding tallies were primarily driven by megarounds of more than $100 million that were uncommon a few years ago, said Anand Sanwal, co-founder and chief executive of CB Insights. The public markets were very favorable to technology companies last year, making investors even more bullish.
There also has been increased demand for startups that solve very specific technology problems for industry verticals such as restaurants, health care and automotive, Mr. Sanwal said. For example, Olive AI Inc., a startup that sells AI software services specifically for the health-care industry, announced a $225.5 million financing round last December.
“People are getting used to really phenomenal applications as consumers, and they go to work and (ask), ‘Why do I need to deal with this thing that’s not purpose-built for this use case,’" Mr. Sanwal said.
Among the internet startups that received the largest funding deals last quarter was DataRobot Inc., which announced last November a $270 million financing round led by Altimeter Capital. Customers such as Nationwide Mutual Insurance Co. and grocer Kroger Co. use DataRobot’s technology to automate artificial intelligence tasks such as data preparation and to monitor their AI models.
DataRobot, founded in 2012, has over $100 million in annual recurring revenue, in part because of significant demand for its technology amid the pandemic.
“We had our biggest year ever, and now we’re growing very rapidly at scale," said Dan Wright, president and chief operating officer at DataRobot.
Last year, large companies were interested in DataRobot’s ability to monitor so-called model drift. Drift is common and happens when new data looks less similar to the historical data on which the AI model was originally trained. Lockdowns, social-distancing rules, unemployment rates and supply-chain disruptions have led some AI models to become less reliable because of drift.
One aspect of DataRobot’s technology can identify model drift and automatically update the accuracy of the AI model in real time, Mr. Wright said. “There’s no way (companies) are ever going back when it comes to just seeing the benefits from increased accuracy in (their) decision-making," Mr. Wright said.
Growth in companies like DataRobot in the internet sector is expected to continue through this year in part because of the pandemic’s tailwinds. “All of the signs are for this to be just a gargantuan year," said Mr. Sanwal of CB Insights.
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