Economic Volatility Does Little to Impact Q3 VC Market

A Quarterly Wink and a Glance at Venture Capital

COVID-19 certainly continues to impact economies around the globe, but U.S. entrepreneurs and venture capitalists (“VCs”) have adapted incredibly well to remote workplaces and virtual meetings. Despite the impact of the pandemic, Q3 VC investment was higher than Q1 and Q2 and on par with Q3 2019. Q3 2020 produced VC investment of $37.8 billion in 2,990 deals, and these numbers were positively impacted by $26.6 billion in late-stage deals—defined as Series C or later—during the quarter.

VC Exits Came Back to Life in Q3

VC-backed exit values in Q3 reached a total of $103.9 billion, which is the second highest quarterly amount on record—surpassed only by Q2 2019. The public listings of Snowflake, Palantir, Asana and Unity accounted for almost 65% of the exit value. Q3 saw 13 IPOs of companies with values of greater than $1B. The general lack of IPOs during the first two quarters of the year may have impacted the frothy IPO numbers for Q3. In addition to traditional IPOs, special purpose acquisition companies (“SPACs”) or blank check companies have become another popular way of going public. This has been a record year for new SPACs, which have raised more than $41 billion through the first nine months of 2020.

Mega Deals on a Record-Setting Pace

For the first nine months of 2020, VCs have closed 223 mega deals ($100M and above) totaling $53.2 billion.  This year should exceed the mega-deal record for both deal value and deal count. The record for mega-deal value is $63.9 billion in 2018; the record for mega-deal count is 242 in 2019. Even during a pandemic, it is interesting to see both the high level of activity for VCs investing in mega deals and achieving exits through IPOs and SPACs.

Lower End of VC Market Experiencing a Slowdown

With the trend toward larger deals, angel and seed capital investment is definitely exhibiting a slowdown in 2020. Q3 angel and seed capital investments were down from Q1 and Q2 and also recorded the lowest deal value since Q2 of 2017. Start-ups looking for their first financings are also experiencing difficult times, with first financings reaching a 10-year low in Q3. On a positive note, early-stage VC activity began to show signs of a comeback in Q3, with $9.2 billion invested in 657 deals. While early-stage activity is still way behind the record years of 2018 and 2019, the Q3 results indicate that early-stage investors are adjusting to investing funds in this virtual world.

VC Continues to Attract Limited Partner Capital

Venture capital fundraising through the first nine months of 2020 has already eclipsed the 2019 yearly fundraising total. During the first three quarters of 2020, VCs have raised a total of $56.6 billion for 228 funds, which exceeded the $54.9 billion raised in all of 2019. Fund sizes tended to be on the larger side, with the average fund raised at $257.2 million. Funds with a good track record and established limited partner relationships are continuing to raise capital, in spite of the uncertainty brought about by the pandemic.

Outlook

COVID-19 has certainly changed the way we all work, learn, communicate, teach, and receive health care. Some of these changes will be permanent, and they have definitely influenced the how and what of VC investment. VCs continue to focus on pharma, biotech, fintech, edtech and telemedicine innovations. A few weeks into Q4 and a high level of economic uncertainty remains. We are also in the final weeks of a presidential election and dealing with a possible second wave of the virus and its related economic impacts. Stay tuned as Q4 may be an interesting bellwether for 2021.