Venture Capital Continues Growth Trajectory

DP: Alan, despite the coronavirus pandemic that continues to plague the world, it appears VC activity remains strong. Tell us about that.
AW: Dave, I was probably more surprised than most how resilient the market really was. Maybe it's just as a result of the fact that a lot of the VC investment that was made in the second quarter was as a result of deals that had already started way before the COVID-19 pandemic. Really the second quarter, the $35 billion of venture capital was invested, that's on top of the 34 billion that was invested in the first quarter. $69 billion for the first half of the year is a pretty robust number. It's really on almost record pace compared to last year. I think last year was 140 billion for the full year, so we're right there.

I think the third quarter will be a good indicator of what the rest of the year is going to look like and maybe beyond that. I thought that what was really interesting was in the first half of this year, $69 billion of venture capital was invested, and that's almost more that was invested during the last recession in 2008 and 2009. So we had more invested in six months today that was invested during the entire recession of '08-'09. So the market is very resilient and dollars continue to be invested. Pleasant surprise.
DP: One of the bright spots of the economy. What sectors are you seeing the most activity?
AW: It's certainly software and healthcare. Anything that has any relationship to COVID-19 is certainly getting an awful lot of traction. Other areas that sort of offshoots of the healthcare and software space, I think you're seeing significant checks written in the telehealth space, online education, anything that has to do with work collaboration and remote workplaces, online commerce since brick and mortar retail has been shuttered for so long, and then online social networks because people are looking for outlets as a result of social distancing. I think those are the areas that have attracted quite a bit of capital this year.
DP: Yeah. That makes sense. Talk about mega deals for a minute.
AW: A lot's going on there right now. Large mega deals, deals of a hundred million dollars or more continue to grow. It's probably just an offshoot of the fact that there is so much dry powder on the sidelines waiting to be invested. I've heard estimates of upwards of $120 billion of dry powder is going to be invested. It's interesting about the mega deals is that even with the virus going on, we're probably going to exceed the number of mega deals in 2020 than the number that was originated in 2019. I think there's been $131 billion of mega deals already completed so far this year and I believe there was 175 billion that was done in all of 2019, so unless we fall off a cliff, it sounds like mega deal activity will continue throughout 2020.
DP: What's your take on valuations?
AW:It's been interesting. There hasn't been a lot of change in valuations in 2020 at all. As I said, there's a lot of capital chasing fewer deals, so the demand for good deals is still there, and so I think VCs are certainly competing with one another and valuations are staying at a relatively high level comparable to where they were last year.
DP: Any final thoughts for our listeners?
AW:As I said earlier in the introduction, I think that the third quarter of 2020 will be a real bellwether because now I think VCs are going to have to do deals almost entirely virtually. You're seeing deal origination happen virtually. You're seeing meetings with entrepreneurs and management teams being done virtually. You're seeing due diligence being done virtually. So it's going to be interesting to see if the same level of activity could happen in the virtual economy in the latter part of this year. I think only time will tell, but I'm very curious to see how the third quarter of 2020 plays out.
DP: Yeah. Hopefully the next time we chat in Q3 the momentum will still be going.
AW: I hope you're right, Dave. It'd be a great thing for the economy. Yeah.
DP: Well, Alan, as always, thanks for your expertise and your insights.
AW: Thanks, Dave, and stay well.
DP: You, too. And thank you for listening to the EisnerAmper Podcast series. Visit eisneramper.com for more information on this and a host of other topics, and join us for our next EisnerAmper podcast when we get down to business.