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In Q2 2020 the United States saw a total deal value of $34.3B, a slight decrease from Q2 2019.
It’s that time in the quarter when Pitchbook shares its quarterly Venture Monitor report showcasing data and trends on USA Venture Capital activity during the second quarter of 2020. During these COVID-19 times when there has been so much uncertainty around this topic, Pitchbook’s report is extremely useful to understand what the investment sphere might look like in the upcoming months.
Throughout this week, Endeavor Miami’s DataHub will analyze the data shared on VC USA trends and narrow down on VC trends for the Southeast USA, Florida, and South Florida. While we will also provide some opinions or possible thought-provoking questions, we do not present these as investment guidance in any shape or form.
In Q2 2020 the United States saw a total deal value of $34.3B consisting of 2,197 deals (YTD $69.1B and 5,058 deals), a slight decrease from Q2 2019 the deal value $36B and deal count of 3,102.
Due to uncertainty surrounding COVID-19, most VC funds are investing in follow-on rounds rather than first-time investments. First-time investments make up 23% (496) of the total number of investments done this quarter and represents only 5% of investment value ($1.7B) a 3% decrease from this last quarter and a 6% decrease from Q2 2019. Funds are helping their bigger companies get through the hump but also de-risking their investment portfolio.
The lower number of deals and higher dollar-value per deal is correlated with the funds’ behavior of doing more follow-ons versus first-investments in Q2 2020. As the report mentions, “Late-stage VC deal count uncharacteristically outpaced the early stage in Q2, with particular strength in mega-deals […] and [with] investors looking to protect their largest and best deals. Contrasting this trend, first-time financings have fallen sharply, dropping to multi-year low as a proportion of overall VC activity.” (Pitchbook Venture Monitor Q2 2020, Page 5)
Most funding for this quarter was concentrated around late-stage VC investing.
Pitchbooks Venture’s monitor mentions angels’ high-risk tolerance explaining their unsteady behavior during crisis times; this is great given that angels are core pillars to a company’s inception and entrepreneurial ecosystems. On the other hand, the decrease in seed-stage investment is worrisome, given they tend to cater to bigger size companies that angels, these companies tend to have already a little bit more impact on the local economy. For these startups that seed-stage investment is key to the development of a core team and their product. Also, with founders seeking smart money more than ever, lower seed-stage investment from funds is a discouragement.
When looking at the other big part of early startup investing, early-stage VC, we see a deal activity in Q2 2020 that reached $7.8B across 630 deals. Pitchbook anticipates lower deal count by 25-30% as VCs focus on later-stage portfolio companies rather than first-time investments. Early-Stage VC is also seeing a trend towards larger deals with a proportion of deals $10M+ in value making up 37.5% (36.6% 2019) and deals $25M+ making 25% of H1 2020 early-stage-VC deals. Most megadeals ($100M+), however, continue to be late-stage VC.
This decrease in investments for early startups (seed, angel & early-stage) makes us wonder about the future behaviors these startups might start adopting.
These are the questions that as an entrepreneurial ecosystem stakeholder we must ask.
Now, let’s take a look at the late-stage VC investment since it has taken the main role of the overall VC activity in this second quarter. There have been 1,501 late-stage deals to date, higher than in 2019 (1,497), with nearly $47B invested in late-stage companies ($41.9 Q1-Q2 2019) setting 2020 to have a new yearly high (2019 $79.7B across 2,847 deals).
Late-stage companies have raised funds for two main reasons, to either:
This points to the behavioral trend of funds focusing on follow-on investments, to keep their portfolio companies, and therefore return on investment, healthy. Pitchbook shares this conclusion in the report, “In Q2, more late-stage VC deals were financed than were early-stage investments, a strong statement by investors looking to protect their larger investments and portfolio companies likely to achieve a successful exit.” (Pitchbook Venture Monitor Q2 2020, pg. 11).
This also explains the increase in an all-time high in mega-deals ($100M+) this first half; 2020 has seen 100 late-stage VC mega-deals (Q2 57 mega-deals) in track to surpass 175 from 2019. Given the average timeline of fundraising, it is safe to assume most of the mega-deals closed in Q2 were already on track before COVID-19 hit the US. It will be interesting to see the trends of mega-deals closed in Q3 & Q4 2020, given it will more likely reflect the aftereffects of the pandemic.
Interesting to note, company valuations have not dropped as much as investors would like given the current economic crisis and market uncertainty. While there is a slower pace of growth in these valuations, it is still higher than in previous years. The question as to why is something that has yet to be looked into.
Despite seeing larger deals it seems there is increasing wariness around public offerings, many companies like Doordash that were in line towards an IPO this year have opted for other sources of capital. This points towards a longer time for investors to receive the value from their investments. Moving forward, this will add another reason for investors to hold-off of new early-stage investments as they try to maintain their planned ROI and cash flow projections. As investors move to late-stage investments and follow-ons to maintain their desired ROI this year, we suspect less money overall will be allocated to early startups until the end of 2020. This brings us back to the question stated earlier, could this crisis spark a new wave of entrepreneurs, like most crises tend to, or will this create a lag in startup creation and bring us back to the world of big companies?
DataHub is Endeavor Miami’s insights department analyzing data and trends of Florida’s Entrepreneurship ecosystem. If you have any questions or would like to learn more please contact email@example.com
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