US venture capitalists raise $34 billion in Q1 2020 amid economic slump, report

The United States venture capital market has maintained a strong performance in the first quarter of the 2020 but the decade long rise could now flatten as the impacts of corona virus crisis become more pronounced, a new report on venture capital activity in the entrepreneurial ecosystem produced by PitchBook and the National Venture Capital Association (NVCA), with support from Silicon Valley Bank and Carta has revealed.

As has been the case in the recent years the US VC market has largely been supported by more mature startups and high capital availability, but these may take a hit as recent macroeconomic realities and widespread market volatility takes a toll 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 internal rate of return 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.

John Gabbert, founder and CEO, PitchBook: “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. 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.”

In the first quarter of 2020, venture deal activity saw $34.2 billion invested across 2,298 deals. 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 the first quarter. 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 (more than $100 million) that have closed in the first quarter.

While first quarter 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 per cent 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 per cent year-on-year.

Bobby Franklin, President and CEO, NVCA: “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. 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.”

The full report can be accessed here

www.nvca.org

www.pitchbook.com