Despite COVID-19, Venture Capital Activity Stays Strong During Q2

A Quarterly Wink and a Glance at Venture Capital

The resiliency of the venture capital industry was certainly on display during Q2 2020. The economy of the entire country was impacted by shelter-at-home orders, temporary closure of non-essential businesses, and the uncertainty regarding the future. Companies and employees had to learn to conduct business remotely, and this was no different for the venture capital industry. Despite the pandemic, venture capital investment in Q2 stayed strong and certainly on a level consistent with Q1. Q2 produced VC investment of $34.9 billion in 2,758 deals as compared to $34.2 billion in 2,300 deals in Q1. To put this in perspective, the $69.1 billion in venture capital invested in the first half of 2020 exceeded the total amount of venture capital invested during the recessionary period of 2008 and 2009.

VC Focus Changes During Q2

For the first several weeks of Q2, VCs were primarily focused on their existing portfolio companies and extremely cautious about making new investments. As VCs became more comfortable with virtual deal origination, due diligence and execution, deal activity began to increase. Valuations have stayed fairly consistent and with VCs continuing to sit on large amounts of dry powder, demand for new investment opportunities should stay at a high level. As you would expect during a once-in-a-generation event, like COVID-19, investments in the software and health care sectors continue to attract significant VC dollars.

Mega Deals Still Continue to Flourish

For the first half of 2020, VCs have funded 131 deals of $100 million or more, which includes the 57 mega-deals financed during Q2. Mega deals in 2020 should certainly exceed the 175 mega deals closed in 2019. Many of these mega deals are companies that would typically be considering an IPO, but with estimates of dry powder of about $120 billion and the uncertainly of the IPO market, continuing to raise private capital is a good strategy.

Pace of VC Exits Is Beginning to Slow

Q2 saw only 147 VC-backed exits with a total value of only $21.2 billion. The first half of 2020 saw 376 VC- backed exits totaling $45.3 billion. In comparison, there were more than $216 billion of VC-backed exits in 2019, driven mostly by last year’s robust IPO market. This year could record the lowest number of VC-backed exits since 2011 and possibly the lowest value since pre-2017. This lack of liquidity could have a profound impact on VCs as they attempt to return capital to their limited partners.

Fundraising Still Remains Strong

Even with economic uncertainly around the globe, VCs continue to raise large funds. For the first half of 2020, VCs raised $42.7 billion in 148 funds. Over the last decade, only three years achieved higher fundraising numbers then the amount raised in the first six months of 2020. Larger fund sizes continue to be the norm. The first half of 2020 saw 24 funds raise at least $500 million.

Outlook

Even in the midst of the pandemic, VCs seem ready to invest in new deals outside of their current portfolios. The U.S. economy has been kept afloat by a combination of fiscal stimulus through the CARES Act and historically low interest rates. How will the economy fare in the second half of 2020 is anyone’s guess. With VCs continuing to raise new funds and the large amounts of dry powder sitting on the sidelines, I firmly believe that VCs will be writing significant checks in sectors impacted by COVID-19: telehealth, online education, work collaboration tools, online commerce and online social networks.