Venture Capital Fundraising and Investment Dollars Remained Healthy Through 1H 2020 Amid Slowdown in Exits and Deal Count Due to Impacts of COVID-19
July 14, 2020
SEATTLE, July 14, 2020 – Despite external economic headwinds, venture capital (VC) fundraising activity exhibited strength in Q2 2020 while exit and dealmaking activity slowed due to the impacts of the coronavirus pandemic, 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 Certent. The ten largest funds raised in the first half of the year made up over half of all VC fundraising value so far. Many of these funds likely began fundraising before the uncertainty of the coronavirus pandemic affected the markets, but closing such massive vehicles remains an impressive feat. Exit activity continued its pandemic-induced struggle during the second quarter, with exit count in 2020 tracking to be the lowest since 2011. With this significant reduction in the number of companies achieving liquidity for investors, there could be serious implications for the rest of the VC ecosystem in the coming years. On the dealmaking side, activity has decelerated rather significantly when looking at figures for the broader industry. However, late-stage financings have outpaced early-stage financings as companies took advantage of high capital availability and investors looked to protect their largest and best investments. While this phenomenon may simply be a COVID-related anomaly in the long term, the high activity at the late-stage is the culmination of many of the recent trends within the US VC industry.
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“The strength of VC exits over the past few years has provided LPs with capital to commit to new funds. As a result of strong fundraising, GPs have built up a large stockpile of dry powder, which should allow them to weather the economic downturn due to COVID-19,” said John Gabbert, founder and CEO of PitchBook. “However, the short-term aspect of this disruption is crucial, as an extended economic decline would change some longer-term behaviors around commitments to VC. This is even more important now that funds are taking longer to liquidate and are retaining higher proportions of unrealized value than we saw in past downturns.”
Fundraising Activity Through the first half of the year, US VCs closed 148 funds totaling more than $42.7 billion, which has already surpassed the full-year total for every year of the decade except 2016, 2018 and 2019. VC mega-funds ($500 million+) have been especially prolific in 2020 with 23 closed so far, which nearly equals the full-year number for 2019. This uptick in outsized funds drove the 2020 median fund size back over $100 million for the first time since 2007 and also contributed to a spike in the average fund size to $300.9 million. Notable large funds that closed this quarter include General Catalyst with a $2.3 billion vehicle and a trio of Lightspeed Venture funds each over $890 million. Much of the success of established VCs has to do with their positive historical performance and name recognition, which has been particularly helpful in a period when no face-to-face meetings are taking place. First-time funds have seen a noticeable drop in new closed funds through Q2 2020, only raising $1.5 billion across 14 vehicles. This is likely due to an inability to capitalize on existing investor relationships, and it doesn’t look like first-time fundraising activity will rebound in 2020, as economic uncertainty could encourage LPs to cut down on new allocations to VC, especially to unproven managers.
Exit Activity By quarter’s end, exit counts showed the extent of the steep decline that began with the onset of COVID-19 in March. Only 147 exits closed in Q2 worth $21.2 billion, bringing the 1H total to $45.3 billion. It’s hard to measure these figures against 2019 given the massive IPOs that closed last year, but exit values are pacing to drop back towards levels seen pre-2017. Given the exit market provides the release valve to the massive amount of capital that has built up in VC, without a functioning pathway to liquidity, the whole industry could suffer. On the IPO front, there was some positive momentum toward the end of Q2 with companies outside of the biotech industry or special purpose acquisition companies (SPACs) completing or filing for public listings. As an example, the Vroom IPO valued the car selling platform at just over $2 billion, which is especially notable as the automobile space has been significantly impacted by the pandemic, potentially implying that the IPO window could be open for a wide swath of startups. Although the pandemic's effects on potential liquidity haven't yet reached the dire levels we saw from 2008 through 2010, the next couple of years still hold plenty of uncertainty that may further depress activity.
Investment Activity Venture deal activity slowed in the second quarter with $34.3 billion invested across 2,197 deals, a 23.2% decline in deal count compared to Q1 2020. While angel activity stayed relatively steady, completed seed deals saw a massive slowdown in Q2. It’s also unlikely that 2020 will see the third consecutive year of early-stage investments exceeding $40 billion, as investors reevaluate portfolios and shore up balance sheets for the quarters to come. Investors have also doubled down on portfolio companies as follow-on financing activity heavily outweighed first-time financings during Q2. Unexpectedly, there has not been a drop in late-stage activity with deal count tracking at a higher pace than 2019. 57 late-stage mega-deals ($100 million+) closed this quarter, bringing the total of late-stage mega-deals to more than 100 so far in 2020, easily on track to surpass the 175 closed in 2019. These high figures can be attributed to some sectors realizing newfound growth and capitalizing on capital availability while other sectors experienced disruption to growth and needed to raise unplanned rounds to weather the market downturn. Nontraditional participation did not subside through Q2, either, as corporate VCs participated in 26% of all US VC deals, a new high. PE firms have been investors in 13.9% of VC deals, a higher level than any previous full-year figure.
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Jennifer Friel Goldstein, Head of Business Development, Technology and Healthcare, Silicon Valley Bank “Core fundamental businesses are still highly prized and have deeper cash reserves than we saw in past downturns. There is also still plenty of dry powder on the sidelines, waiting to be deployed. The guessing game is where that capital goes: to tried-and-true businesses that are ramping growth, disruptive new businesses building for the new normal, or somewhere in between.”
Joe Horowitz, Managing General Partner at Icon Ventures “There will be a great deal of uncertainty in the industry over the next several quarters. Sustained unemployment, earnings reports for non-tech companies, and where the public markets go in the next few quarters are all looming concerns. The Federal Reserve and Congress have made efforts to try to minimize the damage, but the virus is not going to just go away. The world has changed, and it is going to be messy getting to the new normal, including for VCs and startups.”
Ryan Stroub, Chief Financial Officer for Certent, Inc. “The key for venture-backed companies in this environment is extending their cash burn, whether it be by slowing hiring or other investments aimed at carefully managing recurring costs. Although 2020 has been difficult for investors to back entirely new prospects, deals are still closing. Some segments are thriving with the universal remote work requirements, such as fintech, tech, and certain consumer-facing businesses.”