Welcome To the Status of Venture Capital Report Q4 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 Realize That Most Founders And Investors Will Still Prefer Zoom Meetings?
...Even after a vaccine, according to a NFX survey of 526 Founders & Investors!
The same survey found that an overwhelming 68% of Investors are likely to invest in startups outside of existing tech hubs like the Bay Area, New York, or Los Angeles.
Why this matters...
We see a new status quo for VC investments, one that is no longer limited by geographical barriers.
Join us remotely February 22nd - 26th to learn how your startup can build a repeatable playbook to acquire, retain & grow customers.
Pandemic has removed geographical barriers for founders and investors to meet, benefiting founders outside tech hubs as it translates into a higher volume of meetings and perhaps faster fundraisings.
This shift is further driven by the recent trend of founders and startups relocating outside tech hubs and the continued preference for Zoom meetings (as seen above).
2020 in a nutshell
2020 was a bumper year for VC with the highest record totals ever.
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Startups finished 2020 much stronger than how they started the year, with venture funding in the Americas and Europe up 25 percent year over year to $194 billion. Deal value in the USA topped $150 billion for the first time.
Growth in vc activity
Driven Heavily By Industries Heavily Disrupted By The Global Pandemic
Work, health care, education, finance, shopping and entertainment were the most affected. Demand skyrocketed for tech infrastructure and cloud services companies supporting this transfer, leading to a strong IPO and M&A market as companies looked to consolidate and compete.
Vc market followed the public market
Particularly In Later-Stage VC - Series C And Later Rounds
That segment grew 8% over 2019. Private equity growth in venture-backed companies was even more pronounced, at 73% over 2019.
Aggregate deal values remained strong
Even Though Deal Counts Continued To Drop As Investors’ Flight To Quality Continues
Funding in Q4 slightly topped Q3 at $54.3B, making Q4 the biggest quarter in investment dollars in at least the past three years. COVID hit Q1 the hardest in 2020, but the funding pace was already back on track by late March.
Declining deal count
We Consistently Saw Less Deals In Q4 Across Regions And Stages
However, the total deal counts across the Americas and Europe were still up 10%. This growth margin is expected to only grow as a large percentage of seed funding is added over time by founders.
Let’s Look At The Numbers….
USA vc landscape in Q4 '20
In The USA, The VC Dollars Invested Dropped
Investment dropped 5% since the last quarter but still show solid 40% growth since Q4 ‘19. The deal count also dropped 17% since last quarter and 19% over Q4 ‘19.
Europe vc landscape in Q4 '20
Europe Seems To Be Bucking The Downward Trend That We Saw In The US Rather Well
As the VC dollar invested jumped 25% over last quarter and 80% over Q4 ‘19. However, the deal count plunged even further than the USA at 20% since last quarter and 37% over Q4 ‘19.
Latam vc landscape in Q4 '20
In Latin America, The VC Dollar Invested Almost Held Steady
It only dropped 2% since last quarter but showed a phenomenal 93% growth over Q4 ‘19. However, the deal count continued to suffer and was down 23% since last quarter and 38% over Q4 ‘19.
The massive jump in dollar invested is artificial
As three mega-rounds contributed 57% towards the $1.4B in the VC dollars invested in LatAm in Q4, including:
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Kavak raising $397M round led by SoftBank, Greenoaks and DST Global at $1.55 billion pre-money.
Creditas raising $255M Series E led by LGT Impact Ventures alongwith Softbank at $1.50 billion pre-money.
SaltPay raising $149.6M at undisclosed terms.
Diving Deeper Into The Stages Tells Us What’s Happening At Ground Level…
Seed funding
At $2.5 Billion, Seed Funding In Q4 Was Down 18% Since Last Quarter
And 10% over Q4 2019, per Pitchbook data. Note that data lags for seed funding are the most pronounced, so these percentages will likely come down over time.
Although Current Figures Show A Decline In First-Time Financings...
...Lagged data may push 2020’s deal total above 2019’s, which would mark the highest annual count since 2015, which would be a surprising outcome given the overall climate in 2020. The year had a solid ending for first-time financings despite headwinds. After a swift decline in Q2 at the onset of the pandemic, first-time financings have begun to return to past years’ levels.
VC perspective...
As valuations tapered at seed stage, median and average deal sizes at these stages reached new highs. This is because investors are looking to be compensated with a higher future return by taking larger stakes in the deals.
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The industry’s move to teleconferencing software made meeting with investors easier, but finding those investors without in-person networking events challenged young founders without built-out networks.
The industry’s transition to digital dealmaking has been relatively smooth and swift, and investors ultimately closed roughly the same number of angel and seed deals in 2020 as in 2019.
Angel and seed valuations did not increase in 2020 as expected. These were the only stages to see a decline in the median pre-money valuations from 2019, with 2020 marking the first time that seed valuations had waned since 2009. However, the impact on valuations has been minimal given the industry’s quick adaptation, with only Q2 data showing any evidence of pandemic-related slowdown.
Early-stage did suprisingly well
Early-Stage Deal Activity Finished Strong In 2020 Even Within COVID Context
Early-stage funding also racked up $17.5 billion deal value in Q4, up 17% since last quarter and beating Q4’ 19 numbers but more than a third at 35%. Overall, early-stage VC in 2020 was down 11 percent compared to 2019.
VC perspective...
Late-stage funding is riding the wave
Late-Stage Total Deal Value Dropped 4% Since Last Quarter
With 1119 rounds raising $33.6 billion. However, we expect this drop to close as Q4 deal numbers continue to trickle in over the coming weeks and months. Also, bear in mind that Q4 deal value growth was up 67% over the same period in 2019. So plenty to celebrate here!!
The strongest segment
Late-Stage VC Has Been The Strongest Segment Of The Venture Ecosystem In 2020
We saw an uptick in both deal value and count for these mature startups, while totals for the rest of the market were flatter. For the first time ever, investors deployed over $100 billion in a single year to late-stage companies, which represented a record two-thirds of total VC deal value.
Capital fueled growth
The Sheer Amount Of Capital Available To Late-Stage Has Fueled Its Explosion
As we've seen for the past 3 years. We have only seen strength from nontraditional investors, who many expect to pull back during the turmulus past year. The robust exit market from the past two years will continue to drive distributions back to LPs, reaffirming allocations to VC.
VC perspective...
Investors have increasingly concentrated capital into mature companies for many reasons, among them now the shift to remote work and the complications to dealmaking that it produced.
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Late-stage companies tend to possess more concrete financial metrics and other operating data points relative to those in earlier stages of development.
With this data, investors can more confidently complete a transaction without meeting the founders face to face, putting earlier-stage companies at a disadvantage.
As COVID-19 vaccines roll out, we expect VC investors to return to prepandemic behaviors around due diligence in the near term.
Exit Landscape
Quarterly vc-backed exits by type
In 2020, 41 Venture-Backed Companies Were Acquired For More Than $1 Billion
Selling for $104 billion collectively. That was the highest count and amount for billion-dollar exits over the past decade, with 2018 notching the second-highest record at 31 companies acquired for a total of $95 billion.
vc-backed global acquisitions
All Told, More Than 1,500 Companies Were Acquired For $149 Billion By More Than 1,300 Acquirers In 2020.
VC perspective...
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Notables In 2020
Notable Acquisitions in Q4 ‘20
Notable IPOs in Q4
In 2020, 65 tech companies went public, raising a total of $38.6 billion – a significant improvement over 2019, which saw 49 companies go public raising $25.8 billion (Source: Dealogic).
Airbnb and DoorDash were the two most highly valued venture-backed companies to go public via IPOs in 2020 and did not disappoint.
Airbnb opened about 115% above its IPO price at $47 billion, and as of Jan. 8, 2021 is trading at close to 2x that valuation. DoorDash opened 78% higher than its IPO price at $39 billion and is currently up more than 50%.
VC Perspective...
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What We're Expecting From Public Market In 2021
2021 will be a busy year for iPOs
Public Investor Enthusiasm For The Biggest Names Is As Strong As Ever
Following 2020, which set a record for the amount of capital raised in IPO, we expect 2021 to be a busy year for IPOs. Public market performance of Airbnb and DoorDash indicates public investor enthusiasm for the biggest names is as strong as ever. In 2021, we will continue to see investors prefer fast-growing companies in strong sectors like enterprise software, as well as household brand names.
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First major tech IPO in '21 confirms it
Early Trading In Affirm Already Signals Optimism
Affirm, which is a commercial lender, opened at 86% higher than its IPO price at $22 billion market cap. This represents a 661% premium to its $2.9 billion private market valuation in April 2019.
IPOs We're Watching Closely...
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Instacart: the on-demand grocery-delivery service was last valued at $17.7 billion (Oct ‘20) and is expected to IPO in early 2021. The big question for investors to weigh is whether a vaccine will change consumer behavior and shrink Instacart’s business.
Coinbase: digital currency trading exchange was last valued at around $8 billion (Oct ‘18). It could fetch a generous valuation in the public markets, given investor enthusiasm for all things crypto.
2020: The year that was
To say that 2020 was an unusual year in markets would be a vast understatement
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2020 was an unusual year by any stretch of the imagination, and we saw that in public markets too. We witnessed the quickest and deepest bear market plunge in history, as well as the fastest recovery from it ever. And while the broader economy is still in a state of repair, investors finished the year in the black. For instance, S&P 500 ended the year up 16.3%, which was an above-average performance for the benchmark index. Here are the best and worst performing sectors of 2020.
The Winners
Software Applications
Companies that enabled remote working and ecommerce were among the top performers. Shopify grew 178% in 2020 and now valued at around $150 billion.
Internet Retail
Aside from Amazon, which remains the undisputed king, ecommerce players like Etsy and Wayfair also had incredible years. Chinese company Pinduoduo, described as the fastest growing tech company in the world, grew 331% in 2020 capitalizing on emerging trends such as social ecommerce, team purchasing, and consumer-to-manufacturing (C2M) sales.
Freight and Logistics
The acceleration of ecommerce happened faster than anticipated, much to the delight of companies like FedEx and UPS. And with the distribution of COVID vaccines being a 2021 challenge, startups are rising up to the challenge and that should benefit the sector as a whole.
The Losers
Banks
Record low interest rates and high credit risks due to laid off borrowers affected banks greatly. Wells Fargo, for instance, was down 44%.
Airlines
Unless you have been living under a rock, you'd know that airlines have really struggled in 2020. United Airlines, for instance, lost more than half (54%) of its market value. However, there has been a structural shift in the industry now that we're living in the golden age of zoom calls and remote work. We expect to see significant drop in business passenger numbers this year and the ripple effects will be seen across relevant verticals.
Aerospace/Defense
Just like airlines, many aerospace and defense players have been unable to rebound to pre-pandemic levels. Boeing, for example, finished the year down 36%.
What We're Expecting In 2021
Disruption will accelerate
The Global Impact Of The Crisis Will Accelerate Pre Existing Transitions
A year of COVID-19 has pushed forward a decade or more of disruption, and we'll continue to see that in 2021
The undoing of existing distribution channels
2021 Will Be About The Macro Trend That Is Driving The Most Change In Our Lives And The Market
We’ll see more and more products and services undergoing transition bypassing gatekeepers and removing unnecessary friction and cost. This will enable the distribution of given product or service over a wider area where and when they’re needed most. Case in point, digital unlocks replaced stores, Netflix replaced movie theatres and peloton replaced gyms.
The post-covid-19 world
Every Business Will Become Digital First
Across sectors, habits developed during the pandemic won’t go away, and not just the habits of Zoom and working from home. A good chunk of commerce, interactions, and workforce is moving online.
Crisis creates opportunities
COVID Has Reinforced The Legitimacy For Public Investments In Health Systems And Infrastructure
The world will recognize that “ecosystem health equals human health,” and focus new attention on the environment. Telemedicine is here to stay. Universities will change radically and permanently, but this overhaul was long overdue.
Explosion of micro vc
The Rise Of Operator Angels + Micro VCs Will Explode In 2021
This is already well underway, but there will be an explosion of rolling funds, operator angels, and micro investors who want to co-invest in friends, companies, and cohorts they are a part of.
Esg reaches a tipping point
Only Recently The Term ESG Gained Mainstream Traction In The Investment Community...
But in a short amount of time, the trend has blossomed into a full-blown societal shift. In 2020, investors piled a record $27.7 billion of inflows into ETFs traded in U.S. markets, and that momentum only appears to be growing. Fidelity, among others, noted that climate funds are delivering superior returns, which makes ESG an even easier sell to investors. Nasdaq has tapped ESG to be “one of the hottest trends” over the coming year.
Spacs cool down
Much Like Any Hot Trend, Once Enough People Get On The Bandwagon The Mood Begins To Sour
We believe SPACs are going to enter that phase in 2021.
SPACs had a monster year in 2020, raising $82 billion, which is more than in the last 10 years combined. Of course, now that these 200+ companies are flush with capital, they’ll need to find a target. We dug deeper into it in our last edition.
SPACs Are Going To Vastly Underperform Over The Couple Of Years
Since there aren’t enough good opportunities to satisfy that level of demand. Though some verticals, such as the advanced mobility tech space, will continue to be an area of concentration for SPAC combinations in addition to attracting ample late-stage capital. In the next two years at least, we expect continued competition for deals between SPACs and late-stage investors, as SPACs try to reverse the “private-for-longer” trend that developed in the decade ending 2020.
Finding balance b/w hubs vs. offices
The World Tries To Find A Balance Between Remote Work And Office
Startups are enabling deep work to continue remotely, while corps would opt for team reunions at office. This bodes well for the co-working dream, which is alive and well post WeWork saga and we expect many switch to the hotel or hot-desk model for remote work needs.
Hottest Sectors in 2021
Pay attention to Remote Work, AI, CleanTech & Environment, Health & Hospitals, and Blockchain & Crypto - the hottest sectors in 2021.
Join us remotely February 22nd - 26th to learn how your startup can build a repeatable playbook to acquire, retain & grow customers.
According to an NFX survey of 526 Founders & Investors, founders identify Remote Work, AI, CleanTech & Environment, Health & Hospitals, and Blockchain & Crypto as the top 5 hottest tech sectors for 2021.
Investors generally agree but place a stronger emphasis on Blockchain & Crypto than do Founders, with less emphasis on Remote Work. The resurgence of Clean Tech & Environment is notable, as is the continued rise in Biotech.
Conclusion
Life shift back to normal
Closer To How It Was Before The Pandemic
With the vaccine going into mass circulation in 2021, life is slowing inching towards pre-pandemic norms. This means that the adoption of online services will slow down. While, this might be true, the investment already made into the digital transformation and the resulting efficiences are here to stay.
2020 was a landmark year
What Technologies Will The Next Wave Deliver?
Mobile and cloud computing has been around for at least a decade, and with the 5G roll out ramping up this year, we are looking for technologies that the next wave will deliver. At TheVentureCity, we will continue to back founders that are ensuring that this next tech wave delivers on the productivity gains and automation that we are all promised. As whole industries continue to be transformed, we can't wait to see what 2021 has in store for us.
