The US National Venture Capital Association and PitchBook published their Venture Monitor report for Q3 2020 (see the link below).
We’ve analyzed their data to answer a simple question: How much was VC activity impacted by the COVID-19 pandemic in Q2 & Q3 2020?
The pandemic has undoubtedly impacted VC activity.
The Overview graph (p.5) shows that Q2 2020 deal value increased vs. Q1 2020. It is not a surprise, as many deals closed during that period were initiated before the pandemic hit the US last March.
However, deal value decreased in Q3 2020 but remains higher than Q1 2020. It doesn’t mean that the pandemic had only a mild impact, in our view. Without the pandemic, that bar would probably have been much higher. The “opportunity cost” must be taken into account.
In terms of deal count, there has been a sharp decrease over Q2 & Q3 2020. This is in line with reports of VCs focusing more on their portfolio companies than new deal flow. It has also been difficult for many investors to diligence deals without meeting the Founders first – especially in early-stage investing.
(Note: we’ve decided to ignore the “estimated deal count” data as there doesn’t seem to be an explanation of how these are calculated.)
Most of the report’s graphs seem to indicate a neutral impact of the COVID-19 crisis on valuations. This is contrary to anecdotal evidence we’ve received from our contacts in the market and other accounts.
The variance may come from the lack of quarterly data on valuations in the NVCA/Pitchbook report. Data shown includes Q1 2020, which may blur the picture. Besides, although there have been talks of signed term sheets being adjusted when the pandemic hit, it is likely that Q2 2020 activity reflects pre-COVID-19 valuations, too.
The following trends cited by the report have the most significant impact on valuations, in our view:
- A flight-to-quality towards the strongest companies;
- The continued rise of mega-deals;
- The increase in biotech deals.
Overall, however, valuations are probably going down, especially in early-stage VC, and down rounds have hit many startups (see the very interesting CERTENT interview on p.26).
What About Future Trends?
It is an ominously difficult question to answer, all the more since the NVCA/Pitchbook report was published before the second wave of the pandemic hit the US. The result of the Presidential Election was also unknown.
Our take is that the trends observed so far will continue to develop:
- Startups demonstrating resilience and counter-cyclicity will get most of VCs’ interest and money;
- Early-stage bets will suffer more than late-stage activity;
- Valuations, deal structures & terms will continue to become more investor-friendly;
- The best companies will keep benefitting from pre-COVID terms.
📥 You can download the report by clicking here
Do you agree with our analysis? What other trends did you learn from in the NVCA/Pitchbook report?
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