Addressing numerous challenges at once
It didn’t take long for the implications of the shelter-in-place orders to take effect, as limitations on travel and face-to-face meetings made it challenging to get new deals done. With scant opportunities to meet new entrepreneurs and understand their business models, investors focused their attention on entrepreneurs they knew and companies in their existing portfolio, particularly those that needed assistance and additional capital.
Investors and entrepreneurs had to contend with numerous other challenges this past quarter, including:
- Deciding whether to apply for stimulus packages, particularly those tied to the Coronavirus Aid, Relief, and Economic Security (CARES) Act
- Grasping the short- and long-term impact of the pandemic on their business models and companies
- Embracing the digital future, such as virtual working environments, including video conferences with investors, customers and suppliers
- Juggling demands for both work and life. With personal lives disrupted by the shelter-in-place orders, many investors found themselves fighting for “meeting space” and bandwidth in their own homes
Deal volume dropped 40% from Q1 2020, setting a new 10-year low mark, and continuing a trend that we’ve seen for the past several years as deal sizes have grown. Private equity investors put 51% more cash into growth-stage rounds over the prior quarter for a total of $1.8b. We saw this pattern from corporate investors as well, with increased investment to just over $1b. This was largely due to investing in unicorns that needed additional cash.
Using this time wisely
With so much uncertainty in the world today, and the fact that venture capital is a long-term asset class, the current environment provides an opportunity for VCs to tap the brakes a bit. They can spend more time with their existing investments, as well as evaluating new deals. This will slow the pace of investment and allow the market to absorb the massive amounts of capital that have been deployed over the past five years. It will also force companies to be more capital efficient, which often helps drive innovation. There is an old saying in the venture world: a downturn is a great time to invest.
The pandemic has thrown many businesses off their anticipated growth trajectory, which means they may need to stay private longer to bring their companies back on track to their prior valuation. Some may want to consider an IPO, a market that has shown signs of life much sooner than expected. This could lead to more direct listings as entrepreneurs try to raise capital on top of selling direct shares. Longer-term, entrepreneurial companies may rethink their capital strategies and look to go public sooner rather than rely on numerous rounds of later stage capital.
Sector activities and insights
Of the $28.4b invested in US-based start-ups in Q2, $6.5b was raised in the last two weeks of the quarter. In the flurry of activity in late June, 20 mega-round deals accounted for $4b, with 50% invested in health care. Other industries included biotech, consumer information services, food delivery, travel and leisure, cybersecurity, FinTech and entertainment. QoQ mega-round financing deals were up from 62 deals in Q1 to 74 deals in Q2.
