UPDATED 10:01 EDT / JULY 14 2020

EMERGING TECH

Venture capital drops during pandemic-plagued second quarter but starts to recover

2020 has been an unprecedented year thanks to the COVID-19 pandemic, with radical changes in the way tech companies do business coupled with economic disruption that arguably is unrivaled since the Great Depression — and venture capital hasn’t been completely spared either.

The VC industry was disrupted in the second quarter as predicted, but the good news is that the results were not nearly as bad as they could have been, according to the quarterly PitchBook-NVCA Venture Monitor report released early Tuesday.

Different segments of the venture capital market fared differently to others with the biggest overall slump occurring in April amid lockdowns across the U.S. The report notes that through April and into early May, many venture capital firms exercised caution, triaging and focusing primarily on stabilizing their own portfolio companies. But investment started to pick up again by mid-May.

Much of the pickup in investment is credited to government economic stimulus packages, in particular the Paycheck Protection Program, but the report does note that despite some positive trends, uncertainty because of the pandemic is likely to persist for at least the next few quarters.

Venture deal activity slowed in the second quarter, with $34.3 billion invested across 2,197 deals, a 23% decline in deal count compared to the second quarter of 2019 but only down slightly from 2,298 venture capital deals in the first quarter of this year.

Notable among the figures was a slump in seed deals to 315 in the quarter, way down from an average of 650 deals per quarter over the last year. Angel rounds were roughly steady by comparison in the quarter. The dropping investment in seed rounds is attributed to investors re-evaluating their portfolios and shoring up balance sheets for the quarters to come.

Standing out in the data is a trend for investors to double down on portfolio companies, with follow-on financing activity heavily outweighing first-time financing in the quarter. Likewise, there has not been a drop in late-stage activity as deal count tracked at a higher pace than 2019.

In the quarter there were 57 late-stage megadeals, those of more than $100 million. That brought total megadeals to more than 100 this year, on track to surpass the 175 megadeals closed in 2019. The report notes that some of those deals can be attributed to startups experiencing newfound growth amid the pandemic, while others were forced to raise additional funds to weather the economic turmoil.

Late-stage investments are also on track to surpass 2019 with 1,501 deals through the first half of the year, compared with 2,847 deals through the whole of 2019, the latter figure the current record.

One segment that has suffered due to COVID-19 is exits: only 147 in the quarter, worth $21.2 billion, down from 183 exits in the first quarter. By comparison, exits surpassed $100 billion in 2019, but as the report notes, the second quarter of 2019 was record-breaking and hasn’t been matched since. For the first half of the year, there have now been 376 exits, headed toward the lowest number since 2011.

Looking ahead, the report notes that there is some positive momentum, particularly on initial public offerings, such as Vroom Inc.’s. Several companies have filed for IPOs recently, including Snowflake Inc., Palantir Technologies Inc. and Rackspace Technology Inc.

“The strength of VC exits over the past few years has provided LPs with capital to commit to new funds,” John Gabbert, founder and chief executive officer of PitchBook, said in a statement. “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.”

But he added that “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.”

Photo: Coolceaser/Wikimedia Commons

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