Q2-2020    ●    Q3-2020

Venture Capital Report

Q1 2020

Benchmark 

North America, Europe and Latin America

Let’s break down the madness

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Welcome To The Status of Venture Capital Report for Q1 2020

In this new series, we break down global venture capital activity and what it means for you as an investor or founder.


In this brief, we provide a bird’s eye view of the ever-changing venture capital landscape with relevant trends for the future

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Q1 in a nutshell

Before COVID-19 (Q1 ‘ 20)

The market was in a post-WeWork saga, where investors were shifting from a ‘growth at all costs’ mentality to ‘growth with reasonable unit economics and a path to profitability’.


Before COVID-19 hit, round sizes and valuations were getting bigger and more expensive while the number of deals was shrinking.

Post COVID-19 (Q2 ‘ 20 onwards)

It is too early to show any meaningful change in Q1’20 due to COVID-19

So far in Q2 ‘20, the top 20 countries by GDP have implemented social distancing or quarantines, representing 80% of the global GDP. As a result, the global economy has come to a standstill with unemployment figures rising quickly (26 million people have filed for unemployment claims in the US). This reality — coupled with high levels of uncertainty — has forced venture capital funds to make significant changes to their strategy.

These changes will be materialized in Q2 ‘20 figures, but we can anticipate early-stage deals slowing down, funds lowering their investment pace, and company valuations taking a hit. 

we have seen a rapid surge of activity in Some verticals

While many pre-COVID-19 activities have significantly slowed or even completely stopped — such as travel and leisure — we have seen a rapid surge of activity in other verticals. Video Conferencing tool Zoom went from 10 million to 200 million daily meeting participants in just 3 months. Slack reported an 80% increase in paid customers from February 1st to March 25th. Microsoft teams reported almost 4x w-o-w growth in daily active users in March

Accelerated Growth in key verticals

COVID-19 made many people and companies realize that technology has more to offer

This is causing an acceleration in growth and market penetration of verticals like e-commerce, education, health tech, artificial intelligence (AI), and cloud infrastructure. We expect the weight of Digital GDP/ Total GDP to increase more rapidly.

let’s look at the numbers….

What To Expect

A big slow down is coming

Investments in early-stage deals are expected to slow down

Due to the fallout from COVID-19 and the current economic climate. From a survey conducted by 500 Startups, 63% of VCs believe that COVID-19 will have a negative impact on early-stage investment activity in 2020. After a long trend of venture dollars chasing a few hot deals — giving the best founders the upper hand — we expect deal terms to shift back in favor of investors.

Source: NFX

Uncertain Capital Calls

Venture Capital funds will slow down their cash deployment

Amid fundraising crunch and uncertain capital calls with LPs. From a survey conducted by NFX, 78% of VCs surveyed will slow down their capital deployment to 80% or below previous levels. As of today, U.S. VC firms have roughly $150 billion of dry powder available, down from $279 billion that they have raised since 2014 [The Information]. If they deploy $20 billion/quarter — down from $35 billion/quarter from pre-COVID levels — funds will extend their dry powder for an additional year.

Valuations will inevitably take a hit in the short/medium term

This is further accelerated by the public market crash which is causing revenue multiples to drop.

  • We are already seeing this across the board, with most valuations dropping by 20% or more [NFX].
  • Founders will be forced to rethink their strategy and become more cash efficient. As the new common saying goes, ‘runway is the new product/market fit’.
  • During the 08/09 crisis, median round sizes and valuations went down across all stages, to as much as 30% less due to market pressure [Kauffman Fellows].

Unclear when it will normalize

We foresee a Nike swoosh recovery in the latter half of 2020

In term of downturns are always quicker than recoveries as wealth destruction, consumer fear and businesses take time to adjust and regain confidence. 63% of VCs surveyed believe that the impact of COVID-19 on early-stage investing could last between 1 – 2 years. Whereareas, 500 Startups survey point that 93% of VC thinks there’s a risk of recession.

Wait but, innovation loves a crisis

WHILE IT'S EASY TO BE CONCERNED...

we must not turn a blind eye on the opportunities being created

We are all expecting the world to be forever changed after the pandemic. This will mean more opportunities for entrepreneurs eager to build new tools that help people adapt to a ‘new reality’. The most agile companies are already moving quickly to provide new drugs and medical devices, manufacturing and supply chain breakthroughs, improved healthcare processes and tools, effective productivity tools for remote work — the list goes on. While many run away from the chaos, those with enough vision and courage, stay and build for the future. As the saying goes, when the going gets tough, the tough get going.

If history repeats itself...

past economic recessions served as a launchpad for some of the world’s most successful businesses today

This includes Disney (founded in the Great Depression of 1929), Microsoft (oil crisis of 1975), and Whatsapp, Uber, Slack and Square (all founded in the Great Recession of 2008-09). It comes as no surprise that the best-performing vintages tend to be those that invest at the nadir of a downturn and into the early stage of recovery. For instance, 2009 is the first vintage since the 1990s where VC funds produced a median IRR in the double digits, and returns have remained strong for vintages through the 2010s as well [Pitchbook]

Industries taking off as a result of COVID-19

Fasten your seatbelts

Companies are accelerating their digital transformation in order to survive

This has created a surge in demand for software tools that allows companies to reach consumers better and faster, to guarantee the most efficient route from warehouse to home, to enhance teams’ productivity and communication while being remote, and so on. This is reflected in the market cap of companies like Amazon, Shopify, Zoom, and Teladoc Health, who have all overperformed the market YTD.

THE OPPORTUNITIES OF THE DECADE

Investing in the businesses that can quickly capitalize on these changes

Below are some of the sectors we are paying close attention to as a new world is being shaped:

Work-from-home solutions

We are in the early stages of a transformational trend when it comes to remote work. This will grow exponentially in functionality and importance.  This will play positively for productivity tools, cloud services and cybersecurity solutions.

Edtech is now going mainstream

We foresee an acceleration of adoption and utilization and a higher degree of consolidation in the market. This means more players offering broader solutions in place of dozens of tools that need to be patched together.

Telehealth is seeing a big boost

Driven by at-home confinement. We expect this to continue long after the pandemic once people realize the value provided by these platforms. Connected devices will also surge in order to increase the efficacy of telemedicine. AI applied to healthcare – from diagnostics to outbreak detection– will allow the healthcare system to reduce workload, optimize resources and improve the quality of care.

Artificial Intelligence

lthough not a new trend, AI will become increasingly important as enterprises look to reduce costs by increasing automation. Industries like Manufacturing and Retail have been hit particularly hard and are expected to increase their AI-enabled robotics capabilities. This includes Robotic Process Automation and AI assistants for sales support, marketing optimization and routine back-office tasks. 

IoT

Population tracking software and analytics have been part of government responses to the virus, especially in Asia. Smart-city platforms may be benefited from the situation, as public entities prepare for future response.

Virtual & Augmented Reality

As travel continues to see more restrictions, indoor/at-home entertainment is going to surge. Devices like smart glasses and technologies like virtual and augmented reality will become increasingly more popular.

Humanless, Contactless technology

As the ‘new normal’ materializes, we expect an increase in demand for touchless devices such as digital contactless payments, facial recognition and voice-command devices. Autonomous vehicle companies are also positioned to come out of COVID-19 much stronger. With social distancing in place, getting groceries, toiletries and other essential needs has become increasingly challenging. The use of robots, self-driving cars and drones —recently thought of as something so farfetched and out into the future— is making a lot more sense now.

we encourage founders to think of the unimaginable

While these are clear trends that are evolving...

New trends will take us by surprise

Industries like travel and leisure can be turned around and reinvented in a way that we never thought possible. We acknowledge that starting a company is the hardest thing one can do, and doing so in times of COVID-19, will make the best only stronger. At TheVentureCity, we wake up every day to find these fierce and relentless founders that are ready to build the next generation of extraordinary companies.

Closing Thoughts....

Valuations will take a hit in the short/medium-term and most founders should expect at least 20-30% drop in valuations from pre-COVID level

  • VCs are also slowing their investment pace amid fundraising crunch and uncertain capital calls with LPs.
  • At the same time, VCs are keen on verticals that are seeing a surge in growth and market penetration incl. e-commerce, EdTEch, HealthTech, AI, and cloud infrastructure.
  • Founders should expect deal terms to shift back in favor of investors, particularly in early-stage VC, where the mismatch is capital and opportunities is most pronounced.
  • Founders must rethink their strategy and become more cash efficient. It’s all about runway now! Also, the market has shifted from a ‘growth at all costs’ mentality to ‘growth with reasonable unit economics and a path to profitability’.

Thank you so much! Till next time...

THE TONIGHT SHOW. Source: Giphy

TheVentureCity is a new venture and growth acceleration model that helps diverse founders achieve global impact. We are led by an international Dream Team, with experience in hypergrowth tech companies, and inspired by the need for transparency, diversity and fairness in the industry.


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