Welcome To the Status of Venture Capital Report Q3 2020
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Here, we break down the VC activity in North America, Europe and Latin America and what it means for you as an investor or founder.
After going through market intelligence from the industry's most trusted sources, here’s the topline review of what went down in the VC world last quarter…
But first
Did you know that SPAC volumes have almost caught up to traditional IPOs in the US (by volume)?
If this is not what you were expecting, then you’re not alone. The fundraising landscape, from A-Z, has been full of surprises this year… as you’ll discover in this edition.
Q3 in a nutshell
Q3 VC activity gets straight As, reflecting that the startup economy is alive and well during the pandemic.
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The VC industry continues to be very active against the pandemic headwinds. In Q3, we saw lots of deal activity and ample deal values, enough to top last year’s numbers. We’ll be particularly diving deeper into what’s driving the massive expansion of late-stage activity as well as the exit environment, both of which are booming.
Vc deal activity
VC Dealmaking Remains Extremely Resilient Throughout The Pandemic
When lockdowns were rapidly implemented worldwide in March, the prevailing sentiment was that an economic downturn was coming. Back in spring, we also thought that this would impact VC funding and IPO markets. As we covered in the last quarter, we haven’t seen it happening to the same extent and as negatively as we expected…
Everyone Has Been Surprised By How Well The Global VC Market Has Performed So Far This Year
Global VC deal value reached $84bn in Q3, a 34% jump since Q2, and a 39% increase from the same period last year. This is no surprise as VC have come to terms with the new macro and micro-economic normals and get more comfortable with dealflow under the stay-at-home environment.
Another consistent trend we saw
Deal Count Across Regions And Across Stages Is Declining But...
As we predicted last quarter, VCs are not shying away from betting on the right company. However, there are only so many high-quality deals that are available, so VCs are piling up money on fewer top-quality deals, aka “flight from risk, which is a hallmark of the uncertain times that we live in today. That’s why aggregate deal values are healthy even though deal counts are dropping.
Let’s Look At The Numbers….
USA vc landscape in Q2 '20
In The USA, The VC Dollars Invested Held Steady
With a mere 2% growth since the last quarter and 18% over Q3 ‘19. The deal count, however, dropped 17% since last quarter and 27% over Q3 ‘19
Europe vc landscape in Q2 '20
The European Picture Reflected What We Saw On The States Side
The VC dollar invested jumped held on with only 3% growth since last quarter and 15% over Q3 ‘19. The deal count, however, plunged even further at 32% since last quarter and 40% over Q3 ‘19.
Latam vc landscape in Q2 '20
In Latin America, The VC Dollar Invested Jumped 147% Since Last Quarter
And 44% over Q3 ‘19. However, the deal count continued to suffer and was down 30% since last quarter and 46% over Q3 ‘19.
The massive jump in dollars invested is attributed to a rise in mega-deals
As it constitutes five mega-rounds that captured 73% of the VC dollars invested in LatAm in Q3, including...
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Kavak raising $397M round led by SoftBank, Greenoaks and DST Global at $1.55 billion pre-money.
Rappi raising $300M Series E from T. Rowe Price at $3.2 billion.
Neon raising $300M Series C led by General Atlantic.
DLocal raising $200 million round led by General Atlantic at $1 billion pre-money.
Acesso Digital raising $108M round led by SoftBank and General Atlantic at $115M pre-money.
Diving Deeper Into The Stages Tells Us A Very Different Story…
Seed funding
At $1.9 Billion, Seed Funding In Q3 Was Down Only 8% Since Last Quarter
And 18% Over Q3 2019. We anticipate a YoY drop in seed activity, but the overall decline shouldn’t be nearly as severe as industry predicted at the beginning of the lockdown. However, investor pullback from seed will only be temporary and that competition for attractive startups at the seed stage will eventually rebound.
Early-stage funding
Early-Stage Funding (Surprisingly) Also Racked Up $14 BN Deal Value In Q3
Up 26% since last quarter and steady over the same time last year. A phenomenal rebound! It’s not all rosy though…. The median early-stage deal sizes have remained flat at around $15M. The valuations are also continuing their slow climb despite COVID-19, with median early-stage pre-money valuation being $65M.
VC Perspective
After six months of dealing with a pandemic-induced slump in deal flow, early-stage investors are becoming more comfortable investing in this “new normal.”
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While a combination of logistical hurdles in deal sourcing and networking, a slowdown in deals closing during the summer months, and fears over a second wave of COVID-19 have contributed to a general level of cautiousness among many early-stage investors, the industry has adjusted to shelter-in-place and work-from home policies.
Not to mention…. the entrance of larger multistage and nontraditional investment at the seed stage in recent years has created a competitive environment, putting upward pressure on deal sizes and valuations
Early-stage funding for Q4
We Expect Early-Stage VC Deal Activity To Drop
Given that 2020 so far has only seen 4169 early-stage deals and that we have max 8 weeks of deal-making left in the year, we expect early-stage VC deal activity to drop around 25% since last-years 7000 deals mark. This should be to no one’s surprise, not only because of COVID-19 but also considering that both 2018 and 2019 were record years for the VC industry.
Early-stage funding is riding de wave...
Late-Stage Resilience, A Consistent Storyline During The Pandemic
And Q3 2020 was no different. Late-stage total deal value dropped only 2% since last quarter with 1050 rounds raising $33.7 billion (still up by a third over Q3’19!!).
BTW, in case you didn’t notice... 2020 has already logged $94B in late-stage deal value, shattering 2019’s $91B, which was the previous record.
Why this matters
At the late stage, massive capital investment totals have been relatively normal within VC for the last couple of years.
More and more companies have chosen to stay private longer rather than seek an exit → Late-stage sector has grown significantly over the last 10 years. This translates into a bigger supply of startups choosing to raise capital in 2020.
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Just as in public markets, private markets (including within VC) are experiencing flight from risk, given the market uncertainty. This means three things...
Late-stage companies are more attractive to investors now because they represent a lower risk relative to their early-stage companies.
Investors who are already exposed to VC are looking to consolidate ownership in their perceived winners, fueling late-stage VC activity as companies raise more capital in private markets.
Nontraditional investors, including Soverign Wealth Funds, mutual funds, and hedge funds, which have a reputation of being conservative, have not shied away from VC despite the economic slowdown.
What this all means
Increased Investor Interest In Late-Stage Means Three Things:
- Ramped up deal activity,
- Increased valuations
- Ever larger deal sizes
And we are seeing it in numbers...
In Q3, more than 30.5% of late-stage VC deals were over $25 million and drove 75.5% of the total value at the stage.
Late-stage valuations also continued to soar, with the median pre-money valuations now at $90 million. The valuation uptick is due to a shift in the population of startups choosing to raise capital in 2020.
Q3 saw 189 late-stage deals of $100 million or more, making 2020 the year that saw the most mega-deals in one year.
And who can forget the IPO market...
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Diving Deeper Into The Stages Tells Us A Very Different Story…
Quarterly vc-backed exits by type
At $2.7 Billion, Seed Funding In Q1 Was Up 8% Since Last Quarter
And 17% over Q1 2020, per Pitchbook data. Note that data lags for seed funding are the most pronounced, so these percentages will likely increase overtime.
Ipo Frenzy...
Hot, Highly-Valued Software Companies Went Public This Quarter
Leading the pack: Snowflake, Palantir, Asana and Lemonade. Snowflake was the most valuable software company IPO of all time, valued at $33.2 billion at IPO and now doubled that. The rush of IPOs delivered $103.9 billion in exit value, making Q3 the second most lucrative quarter on record for IPOs behind only the Q2 2019.
However, the IPO market is heavily skewed towards outlier exits ($500M+) that made up around 80% of VC exit proceeds. The public listings of Snowflake, Palantir, Asana, and Unity alone made up 64.8% of the total exit value this quarter.
VC perspective...
The quarter’s IPO activity implies a greater prospect of pricing at an attractive level relative to the last private valuation.
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This is highlighted in the fact that six out of seven VC-backed companies in 2020 with an IPO market valuation above $10 billion went public this quarter.
These figures also highlight the unpredictability around the timing of these game-changing deals. Having said that, exit sizes tick up across the board despite pandemic.
SPAC Madness
SPACS Are All The Rage These Days
Unless you have been living in a cave, you must have known that SPACS are coming in hot. However, with the COVID-19 and Election 2020 double whammy, we’ll forgive you if SPACs flew under the radar for you.
Basically, SPAC (or special purpose acquisition company) is a blank-check firm whose only asset is cash. The point is to have the SPAC merge with a private company, bringing the private company public in the process. If you’re looking to nerd-out on SPACs, here is an excellent place to start, straight from Harvard.
Spacs are having a moment this year
138 SPAC IPOs Have Raised More Than $53 Billion This Year
SPACs are having a moment this year: 138 SPAC IPOs have raised more than $53 billion this year, up from 59 SPACs that raised over $13 billion last year. Q3 saw the IPO of Pershing Square’s SPAC, which raised the largest-ever SPAC at $4.0 billion. SoftBank is now also in on the action and SoftBank-backed Opendoor, an online real estate marketplace, recently announced it’s going public in a $4.8 billion SPAC merger.
Spacs continue to hold the attention
Specially of many private market participants
Despite the return of traditional IPOs, with steady issuance of new SPACs and some newly announced SPAC acquisitions. If you’re wondering how SPAC differs from all the other exit options out there, here’s a quick and dirty chart.
VC perspective...
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While we still believe that the majority of VC-backed businesses will choose to go public through an IPO or direct listing over SPAC, these blank-check vehicles may attract some of the slower-growing or stagnant unicorns that need a new strategic direction and access to public market funding to move forward.
What To Expect For Q4 Exit Market
Positive momentum in Ipos will carry on
Particularly The Performance Of New Listings, Has Encouraged Companies To Move Forward With IPOs
The IPO “pops” of new VC-backed listings have been notably elevated so far in Q3, as a lack of IPOs earlier in 2020 has clearly built-up demand from institutions and retail investors alike.
We expect Q4 to be no different
As Airbnb Prepares A Massive December IPO
Not To Mention, Ant Group, Wish, Root Insurance, ChargePoint And Affirm Have All Recently Filed To Go Public. While Opendoor and AppHarvest are planning debuts via SPACs. Crunchbase currently lists 636 private companies that are valued at $1b or higher, with 33 new unicorns joining in this Q3.
We are in for a busy Q4 2020
A Handful Of Unicorns Are Already Slated For Multibillion-Dollar Deals
Either IPOs, direct listings, or SPAC combinations over the next couple quarters as VC-backed companies look to capitalize while the IPO window remains open.
Closing Thoughts...
In Q3 we saw a shift in Capital instead of correction Investors are risk-adjusting their portfolios, allocating capital into later-stages vs. earlier-stages and into hot industries vs. [negatively] affected industries.
Here's a summary of what it all means for you as a founder or investor:
Join us remotely February 22nd - 26th to learn how your startup can build a repeatable playbook to acquire, retain & grow customers.
The M&A activity is also intense across all sizes of companies as founders are eager to sell given the uncertainty and valuations, which are quite fair. All of this means less competition for startups.
Are you a scrappy founder? Investors are looking to acquire more ownership with less capital in capital efficient companies that can grab more market share as competition fades.
Is your solution needed in a post-COVID world? If it is, are you building the best product in the most efficient way you can? Founders in hot industries like healthtech, B2B software, edtech, logistics – this is your moment, raise now!
The speed of which SPACs have grown this year is a warning sign for investors. Ultimately, time and the market will determine if they are a craze or are here to stayI
