Venture capital investments slowed in the pandemic during the third quarter, but angel investors stepped up with a greater share of investments. Overall, the startup ecosystem has been resilient in 2020 in the face of COVID-19 and other turmoil, according to the PitchBook-NVCA Venture Monitor Report.
Venture investment hit $37.8 billion in the third quarter, up from $34.1 billion in the third quarter a year ago but down from $39.2 billion in the second quarter. There were 2,990 deals (including estimates) in the third quarter, compared with 2,920 actual deals in the third quarter in 2019. Angel investments in Q3 rose over Q2 figures, with capital invested by angels hitting $2.4 billion so far this year, while institutional seed investment rounds have fallen.
As with much of the U.S. economy, there are winners and losers in the patterns of investment.
One of the bad signs about the pandemic is that first-time fundraisers fell to a record 10-year low of 5.5% of all deal value, and 23.7% of the deal count. In the third quarter of 2019, first-time financings were 27.3% of the total. That means it’s harder to convince people via Zoom calls that your brand new startup and your untested deals are worth an investment.
Founders from diverse backgrounds and those between the coasts have also faced challenges. Female-founded startups in Q3, and in 2020 overall are down. And there was lower investment outside the traditional VC hubs of California, New York, and Massachusetts.
Female founders participated in 467 deals so far this year with a value of $1.67 billion, compared to 714 deals and $2.67 billion for all of 2019. The report predicted the deal level will match last year’s rate. That’s discouraging because startups are often the start of a pipeline that feeds women and diverse individuals into the upper ranks of big companies, where the representation of women and minorities isn’t good.
Most VCs are making investments remotely, and the slowdown from the second to the third quarter isn’t alarming, the report said. Q3 was strong largely due to late-stage investments. Six hundred and sixty-two late-stage deals closed in the quarter, with $26.6 billion raised.
Overall, this means that parts of the startup ecosystem is responding admirably to the grave challenges currently facing the U.S. economy, the report said. Startups and entrepreneurs are moving aggressively to address the major challenges such as climate change, health care, COVID-19, and more. Many sectors like gaming are exploding, while other spaces are being reimagined, the report said.
The report predicts significant long-term changes in consumer and business behavior that prove fundamental to the creation of new, large firms that emerge from this turbulent time.
While some sectors have struggled during the pandemic, the adoption of many new startup technologies accelerated and underpinned investment in those spaces. Pharma and biotech startups have, unsurprisingly, fared well, but COVID-19 has also accelerated the adoption of fintech, edtech, and telemedicine innovations. This increased usage of new technologies could ultimately result in permanent new models of working, learning, teaching, and receiving health care.
One sector that could help solve many of these challenges, life sciences, had a very busy and productive quarter. Investment trends for pharma and biotech have been strong for the last several years, but the COVID-19 pandemic has significantly increased investment into these companies, especially companies focused on the discovery, development, and production of vaccines, antivirals, and antibacterial, areas that had previously been underfunded for many years. This surge in investment over the last two quarters could result in a five- to 10-year boost for the industry, the report said.
Low interest rates, healthy public markets, and more money flowing into financial markets have given investors confidence that high-growth companies will be well-valued in the public markets, creating a positive trickle-down effect for startups. The result has been a strong initial public offering (IPO) window for startups across many sectors, including biotech, pharma, and many types of tech companies. Among those that went public were Snowflake, Palantir, Asana, and Unity. That pushed exit values to $103.9 billion in Q3. There were 13 IPOs in the third quarter.
An alternative way to go public has gained traction: the special purpose acquisition company (SPAC), with companies such as DraftKings using SPACs as a quick IPO alternative. Large funds also fared well, raising $56.6 billion across 228 funds in the first nine months of 2020, exceeding 2019’s fundraising value of $54.9 billion.
Broad uncertainties permeate the ecosystem. The COVID-19 pandemic looms large, with the possibility of a second wave and its repercussions. A return to strict lockdown measures in response to a second wave would likely drive the economy deeper into recession, with follow-on effects for public markets. Further declines in economic activity and a drop in valuations would have negative consequences for both VCs and startups. The biggest question mark on the horizon is the upcoming election, the results of which have the potential to create major disruptions across the ecosystem, the report said.