The extent to which the Covid-19 will impact the investments, deal flow, fundraising, and exits in the VC industry in the upcoming months is still not fully known, and this uncertainty prevails because the pandemic has not ended yet. The situation dramatically affected various dimensions of the global economy and many experts believe that this will obstruct the normal venture capital flow.
According to some publications, the early stage startups still have a deferral period before reaching the market and they won’t be much affected. However, the Venture Capitalists have stated that ‘the global Venture Capital market has completely locked up’ and termed this pandemic as ‘Black Swan of 2020’. Despite the challenges, the VC firms are looking forward to investment opportunities throughout the U.S. In this blog post we’ll analyze the VC market in the U.S and see how the pandemic has affected it.
An overview of the VC market in the U.S
Venture Capital in the U.S means funding or financing provided by investors to the startups that have proven to possess excellent growth potential in the future. According to the market trends presented by the National Venture Capital Association, the VC market showed good growth over the last decade. In 2018, it was the highest VC investment which accounted to a total of USD 140 billion; this amount was invested by the Venture Capitalists into the US based startups.
In 2019, the VC investments in the US totaled USD 130 billion, which was again a high amount. Apart from this, there were lots of big deals which included around 237 deals that had round sizes more than USD 100 million.
The chart below describes the mega-deal activity during the decade which shows that there were 208 mega-deal activities in the year 2018, and as of mid-2019 there are already 123 deals in the book.
If we categorize the VC deals according to the states in the U.S, there 3 states that make up most of the concentration; New York, California, and Massachusetts. The VC deals in these states make up more than 85% of the total VC assets in the country. The strongest lead in VC activity is commanded in the San Francisco Bay Area and then in New York, Los Angeles/Santa Monica, and Boston.
The impact of Covid-19 across various industries
The Covid-19 has impacted the VC investment industry in the U.S largely. In 2019, there were 964 VC deals in the seed to Series B stages in the first quarter. However, in the first quarter of 2020, there were only 541 VC deals, which means that the deals were slashed to a 44% decrease.
However, this impact varies according to the type of investment too; the largest impact was on the seed-stage deals. The seed-stage deals had a decrease from 483 to 209 during the March-June 2020 period and that makes it a decrease of 57%. If we look at the chart below, we’ll see that the average check size didn’t change:
The round size isn’t much affected as seen in the chart above. On an average, the VC backed seed rounds are USD 4 million in the U.S, whereas for Series A and Series B these numbers are USD 21 million and USD 62 million respectively. Now when we look at the different industries, the trend is different in the sectors in the U.S.
In the above chart we can see that the series A data firms have experienced a rise in the check size; it was USD 13 million in 2019 and increased to USD 25 million average check size in 2020. The check sizes for VC-backed seed stage also increased from USD 3.3 million in 2019 to USD 4.3 million in 2020. Now let’s move on to the Series B VC investments.
Series B check sizes
Talking about Series B, there are some industries that have seen decline in the deals. The check sizes didn’t decline for the health companies in series B, this is because the healthcare companies, before reaching the sales, need late stage capital. However, the tech-based firms reach the market earlier as compared to other companies. Investors also expect the late-stage capital industries such as the health and medical firms to rely less on the investors and focus more on sales. This makes it easier for the investors to focus on the early-stage capital firms and allow them to grow.
Which tech took the biggest impact from Covid-19?
The answer to this question is quite obvious as everyone knows that the travelling industry was the most affected due to this pandemic. The number of VC investments and deals in this industry faced a dramatic decrease. From March 2019 to June 2020 the seed to series B deals dropped by 400%, that is, from 15 to only 3 deals. The check size also decreased from USD 14.68 million to USD 2.3 million from 2019 to 2020, that is, by 84% overall.
Most Active VC in Each State
Like mentioned earlier, the startups that are based in New York, California, and Massachusetts are the ones that make up the most of the VC based tech investments in the country. There are some VC firms that are investing in tech based startups of almost all of the U.S states. The top Venture Capitalists that made their position in 2020 are Andreessen in California, Lerer Hippeau Ventures in New York, Accomplice in Massachusetts, and New Enterprise Associates in Washington DC.
Not all VC investments have been decreased during pandemic
Though most of the VC investments suffered due to Covid-19, not all of them have slowed down. After an evaluation of the top 20 most active VC firms in the U.S, it was found out that there are 5 firms that recorded more deals during the first few months of 2020 as compared to 2019 (According to PitchBook data).
There are a handful of sectors that have seen a spike in deals in the Covid-19 era which include some big names like Kleiner Perkins, NEA, and Greycroft. The company Greycroft has made 30 deals during 2020 so far as compared to 26 done in the first half of 2019. However, this is a fact that while some investors seem to be active, it doesn’t necessarily mean that they are busy investing more capital. According to PitchBook data, the panic doesn’t led to bargain buying because the down rounds in 2020 is comparable to that in 2019.
The PitchBook data states that during the first half of 2020, the US VC firms with assets of more than $500 million focused on the follow-on investments rather than the new investments as compared to the previous year. This step is done to make sure that the companies with a stronger portfolio get enough cash to keep themselves in a safe position.
Bottom Line and thoughts for future:
No doubt Covid-19 has impacted all the industries on a global scale and we all hope to see the world going back to its normal state. However, as investors and entrepreneurs we all must be flexible enough and understand the change. We must identify and develop new plans and strategies that will take over the entire world soon. Industries like automation, remote work, e-commerce, remote health, and data privacy will see a boost and there will be other means for VC investments. During this pandemic, only those will succeed who will adapt themselves to the new technology and strategies.