Nearly $47 billion was invested into late-stage businesses during the second quarter of 2020, setting the late-stage venture capital (VC) deal value on pace to reach a new yearly high, according to PitchBook’s latest NVCA Venture Monitor report.
Although first-time financings fell sharply, late-stage financings sustained strength in aggregate capital investments, mitigating the impact on overall VC activity. In fact, through the quarter, late-stage VC deals were tracked at a higher pace from the previous year, which had set a record of completed late-stage VC financings in the US.
In addition to the nearly $47 billion that was invested into late-stage companies during Q2, 1,501 late-stage deals were completed year-to-date. This was a strong statement by investors looking to protect their biggest investments, with portfolio companies most likely to achieve a successful exit.
Angel Deals Remain Stable
The report adds that the angel deal count in Q2 was relatively stable, with almost 550 angel financings completed during the quarter. On the other hand, completed seed deals saw a huge slowdown, with only 316 completed seed financings during the period. However, sizes of both angel and seed deals rose, reaching medians of nearly $580,000 and $2.2 million, respectively.
The reasons cited for the seed deal slump were lack of in-person meetings between startups and investors and fewer startup events. This also caused many VC firms to turn their attention inward to their existing portfolio companies and to make sure current investments would survive.
That being said, PitchBook indicates that in the second half of 2020, seed financings will likely rely on the return of investors to bounce back. Sourcing challenges should also begin to subside as investors come up with new programs and capabilities to ensure strong deal flow. Investors are also likely to become more comfortable with not meeting founders in person, in case the pandemic continues to hamper networking events.
Many VC Funds Grow
It should be noted that even in the face of external economic headwinds, fundraising data displayed more strength in Q2. Through the quarter, US VCs closed 148 funds totaling more than $42.7 billion, surpassing the full-year total for every year of the decade apart from 2016, 2018 and 2019.
“VC mega-funds ($500 million+) have been especially prolific in 2020 with 24 closed so far, which nearly equals the full-year number for 2019," the report says. "While many of these funds likely began fundraising before the uncertainty of the pandemic affected the markets, closing these massive vehicles over the last two quarters remains an impressive feat.”
Unfortunately, first-time funds saw a noticeable drop in new closed funds through Q2 2020, raising only $1.5 billion across 14 funds in H1, possibly due to their inability to monetize existing investor relationships. The report adds, “We don’t expect first-time fundraising activity to rebound in 2020, as economic uncertainty will encourage a flight to safety for LPs [limited partners]. If the pandemic lasts long enough, this flight could cut down on new allocations to VC, especially to unproven managers.”
So far, exit count in 2020 has been the lowest since 2011, and the value is on track to drop back toward the levels seen pre-2017. The report states, “This is a significant reduction in the number of companies that are achieving liquidity for investors, which could have serious implications for the rest of the VC ecosystem, especially if the pandemic doesn’t subside in the near term.” There have been only 147 exits at a value of $21.2 billion, bringing the half-year total capital exited to $45.3 billion.
Paycheck Protection Program Comes to the Rescue
The venture community’s trade association, the National Venture Capital Association (NVCA), addressed a slew of unprecedented policy challenges that have hit the industry. The association worked with the Treasury Department and the Small Business Administration (SBA) to address the issues around the affiliation rules so that VC-backed businesses could apply for and get access to the Paycheck Protection Program (PPP). According to PitchBook and the NVCA, a number of startups used PPP loans to retain employees during the crisis period.
Future Remains Uncertain
Despite several positive trends in the latter half of Q2, uncertainty is expected to persist during the next few quarters. Although the pandemic’s effects on potential liquidity haven’t yet reached such grim levels as were seen from 2008 through 2010, the next couple of years still hold a lot of uncertainty, which may further depress activity.
PitchBook predicts that the deal count in 2020 will contract 25 to 30 percent as VCs double down on higher-performing portfolio companies and quickly cut their losses on problematic startups, eliminating many of the early-stage deals they might have completed otherwise.
However, the strength of VC in both exits and fundraising over the past few years has built up a huge stockpile of dry powder and net cash flows to LPs. This wealth has developed a material amount of goodwill in the industry, which should allow many general partners to weather a short-term blip in liquidity, the report notes.