US Venture Capital Investment Has Strong Showing in Q1 2020, with Economic Downturn Brought on by COVID-19 Primed to Slow Activity
14 Apr, 2020, 00:01 ET
SEATTLE, April 14, 2020 /PRNewswire/ -- After elevated venture capital (VC) investment in the past few years, deal activity maintained momentum in the first quarter of 2020 amid the impending economic downturn due to the COVID-19 pandemic, which will slow activity through the rest of the year, according to the PitchBook-NVCA Venture Monitor, the authoritative quarterly report on venture capital activity in the entrepreneurial ecosystem jointly produced by PitchBook and the National Venture Capital Association (NVCA), with support from Silicon Valley Bank and Carta. While the novel coronavirus has sent shockwaves through many areas of the economy, its full effect on VC deal activity has yet to be seen in the data. The early stage saw strong capital investment in Q1, continuing a decade-long rise that seems primed to subside due to the fallout from COVID-19. Many of the VC market dynamics that have supported large deals sizes (i.e. more mature startups, high capital availability) persist in the market today, but recent macroeconomic realities and widespread market volatility will weigh on dealmaking, suppressing deal valuations and shifting terms in favor of investors for the first time in years.
Additionally, the VC market's increasing reliance on large exits to return capital to investors has worked well during a steady and widening public market window, but it will be tested during the remainder of the year after COVID-19 uncertainty brought the long-running bull market to an end in March. On the performance side, VC funds have posted the best horizon IRR of any private market strategy in recent periods through mid-2019, but performance has been decreasing. As difficulties related to coronavirus linger, this downward trend could be sustained and will likely dampen the aggressive portfolio markups that have been behind much of the strength in recent short-term aggregate fund performance. When it comes to nontraditional investors, a distressed venture market could provide opportunity to private equity funds that are able to infuse portfolio companies with equity to sustain a downturn and emerge ready for growth when the economy rebounds.
To download the full report and data packs, please click here. PitchBook and NVCA will also be hosting a webinar in partnership with Silicon Valley Bank and Carta on May 6, 2020 from 9:00 – 10:00 am PDT. Please click here to register.
"Despite these unprecedented times, the first quarter of the year saw healthy venture activity. That said, there are still uncertainties as to what the next few quarters of the year will hold as we navigate the coronavirus pandemic and its full effects on the venture ecosystem," said John Gabbert, founder and CEO of PitchBook. "Although US VC dry powder sat at a record $121 billion as of mid-year 2019, suggesting that there is plenty of capital available for firms to weather the storm, VC firms will need to evaluate situations on an individual basis as differing aspects such as sector focus will largely determine their ability to support portfolio companies."
"The last few weeks have been a whirlwind for the country, including the startup ecosystem. With the economy at a standstill, maintaining operations, sales, and headcount at companies is the priority, but it is understandably proving challenging with most of the population sheltered in place," said Bobby Franklin, President and CEO of NVCA. "Startups will see some options for federal relief from the CARES Act, while others will look to alternative means for cutting costs and capital infusion. The reality is that it will be a tough road ahead in 2020, but as we've seen in past downturns, resilience is in the fabric of this industry. Some of the most successful venture-backed companies were born in difficult times."
Venture deal activity saw $34.2 billion invested across 2,298 deals in the first quarter of 2020. The record-high levels of capital raised by VC funds in 2018 and 2019 have been steadily pouring into early-stage startups, with companies achieving high valuations and deal terms largely favoring entrepreneurs until the fallout from the coronavirus began to alter the financing landscape. Valuations remained elevated, and median early stage deal value reached an all-time high in Q1. Following a new record in 2019 for late-stage deal count, momentum continued into 2020 with deal value already surpassing $23 billion. Contributing to those numbers were 49 late-stage VC mega deals ($100 million+) that have closed in the first quarter. While Q1 figures were strong overall, it's expected that economic headwinds will curtail activity over the next few quarters. On the nontraditional investor side, 29.6% of completed deals included participation from a corporate venture capital (CVC) arm in the first quarter, the highest percentage to date. However, nontraditional investors have participated in fewer than 600 deals so far this year – a pace that, if continued, would amount to a full year decline of around 20% YoY.
VC exit activity got off to a slower start in Q1 compared to last year's record-breaking activity, yet still posted a robust quarterly total with $19.3 billion exited across 183 deals. Large exits still had an active first quarter, with 10 deals over $500 million completed. In a reversal from the last couple of years, acquisitions made up the majority of capital exited during Q1 2020, ousting IPOs from their throne for the first time since 2016. Acquisitions accounted for the two largest exits of the quarter with Visa's $5.3 billion purchase of Plaid and Alphabet's acquisition of Looker priced at $2.6 billion. The public market volatility stemming from the ongoing COVID-19 crisis put a damper on VC-backed IPOs in March that is expected to remain through the rest of the year given how closely the IPO window for private businesses is linked to the conditions in the public market. Comparing figures from the last global financial crisis, only 13 VC-backed IPOs closed in 2008, and only 11 closed in 2009. With 10 completed in Q1 2020, IPO activity in 2020 is expected to drop drastically after eclipsing 80 listings in both 2018 and 2019.
By quarter's end, VC funds raised $21 billion across 62 vehicles. Capital has been increasingly concentrated in larger vehicles as median fund size has grown steadily in recent years. Nearly a dozen mega-funds ($500+ million) have closed so far in 2020, demonstrating the distinct paradigm shift over the past decade in which VC has moved from a niche slice of private markets to the $100+ billion-a-year capital investment achieved over the past two years. Four billion-dollar funds closed in Q1 to account for 47.8% of the quarter's capital raised, with the largest fund of the quarter being Tiger Global's $3.8 billion fund. Perhaps where the slowing economy will be felt the most is with first-time fundraising – just 9 first-time funds have closed so far in 2020, compared to more than 49 raised each of the last three full years. First-time managers and smaller GPs that need to engage new investors are likely to struggle due to travel restrictions and similar impediments. Relative to other private market strategies, smaller VC firms will be particularly susceptible because their size and high-risk strategy provides little financial buffer.
The full report will include the following components:
- Executive summary
- NVCA policy highlights
- Angel, seed & first financings
- Early-stage VC
- Late-stage VC
- Deals by region
- Deals by sector
- SVB: Time to rationalize and reset plans
- Female founders
- Nontraditional investors
- Carta: The growth of employee equity pools
To download the full report, click here.
PitchBook is a financial data and software company that provides transparency into the capital markets to help professionals discover and execute opportunities with confidence and efficiency. PitchBook collects and analyzes detailed data on the entire venture capital, private equity and M&A landscape—including public and private companies, investors, funds, investments, exits and people. The company's data and analysis are available through the PitchBook Platform, industry news and in-depth reports. Founded in 2007, PitchBook has offices in Seattle, San Francisco, New York and London and serves over 40,000 professionals around the world. In 2016, Morningstar acquired PitchBook, which now operates as an independent subsidiary.
About National Venture Capital Association
The National Venture Capital Association (NVCA) empowers the next generation of American companies that will fuel the economy of tomorrow. As the voice of the US venture capital and startup community, NVCA advocates for public policy that supports the American entrepreneurial ecosystem. Serving the venture community as the preeminent trade association, NVCA arms the venture community for success, serving as the leading resource for venture capital data, practical education, peer-led initiatives, and networking. For more information about NVCA, please visit www.nvca.org.
Brenda Santoro, Head of Global Trade Finance at Silicon Valley Bank
"Trade will certainly be affected for a period of time, but companies will want to urgently get back to business, working to source and sell globally and ultimately serve their clients worldwide. Global connections will grow not diminish."
Patricia Nakache, General Partner at Trinity Ventures
"A great many portfolio companies are being heavily impacted by the COVID-19 pandemic. These companies are looking to extend their cash runways as long as possible and find ways to cut costs. VCs are still making new investments, but most of those were already in the pipeline. It will be challenging for VCs to make new investments in companies if they have not met the founding team in person. But once we get past the shelter in place period, down times are usually a good time to be making investments, as companies born in an era of struggle tend to be more battle-hardened and capital efficient. The next generation of great American companies could be born during this downturn."
Share this article