How has the pandemic impacted 2020’s venture capital funding and IPO markets? Crunchbase just came out with its Q3 2020 Global Funding report, and here is a summary of their data:
- Funding in Q3 2020: Global venture funding rose slightly to $76.4 bn, up 1% q/q and 9% y/y.
- Areas of growth: “Crunchbase data shows increased investment between Q1 and Q3 2020 versus the same period in 2019 in health care, apps, payments, education and gaming.”
“Quarter over quarter—when excluding sectors that only showed growth due to a dip in Q2—there has been increased funding to the commerce and shopping, manufacturing, sports, gaming, agriculture and farming, and clothing and apparel sectors.”
- Funding by stage: Seed funding dropped to $2.6 bn in Q3, down 32 percent y/y and 11 percent q/q. Early-stage funding also declined to $19.3 bn, down 18 percent y/y and 14 percent q/q.
Late-stage funding, however, rose to $48.1 bn, up 24% y/y and 26% q/q; “A larger share of funding is going to later-stage rounds in the third quarter at 71 percent.” Additionally, “rounds above $100 million account for 61 percent of funding and come in at 169 rounds for this quarter compared with 148 rounds in Q2 2020.”
- Acquisitions: “Nine venture-backed companies were acquired for more than $1 bn in the third quarter—the highest count per quarter since the beginning of 2019.”
Even with antitrust scrutiny on Apple from the US and EU, the company was the “most active acquirer in Q3 2020, with three acquisitions including Canada-based contactless payment startup Mobeewave, San Francisco-based podcast streaming service Scout FM, and Spaces, a Santa Monica-headquartered company that develops VR, AR and MR for theme parks.”
- IPO market: 2020 is “now on track to surpass last year by deal count and proceeds, with the biggest IPO market by capital raised since 2014,” according to Renaissance Capital. Overall, “six out of seven venture-backed companies in 2020 with an IPO market valuation above $10 bn went public this quarter.”
Companies that recently filed to go public include: Ant Group, Airbnb, Wish, Root Insurance, ChargePoint and Affirm. Opendoor and AppHarvest are also planning to do a SPAC.
Here are our thoughts on these findings:
1) We think it’s pretty remarkable that despite uncertainty about a vaccine, global economic growth and whether pandemic-disrupted consumer behavioral changes will persist, global venture capital funding remained steady in Q3 2020. VCs could have waited for developments to unfold and pulled back on funding given their long-term investment outlooks. Instead, they supported themes they think will last even after life normalizes, such as investing in cloud-based services. Given the fast acceleration of disruptive technology over the past +6 months, we’d argue they may have even been a bit conservative.
2) Venture capitalists continue to invest in later-stage companies, reflecting confidence that the IPO window will remain open (and, presumably, equity market/tech sector valuations will rise) for the next 12 to 18 months. Two points here:
- VCs investing more heavily in established companies over newer, riskier startups is nothing new, but rather a trend that evolved as the global economic expansion hit its late-cycle phase in 2018 – 2019. VCs favored bigger startups because they have greater scale advantages and increasingly large “moats”.
- Now VCs are backing these larger companies even with (we assume) lower returns relative to earlier stage deals since exits through strong IPO and SPAC markets look both increasingly likely and attractive.
3) The seed and early-stage funding data may look weaker than reality since they experience greater reporting delays than bigger deals. Even still, we will look for a boost in support for younger startups in the coming quarters as a sign that VCs believe the US economy is meaningfully improving. They have to think differently than public equity investors in terms of not only forecasting the economic landscape over the next 5 years, but also understanding which industries can be disrupted longer-term post-pandemic.
That’s not only important in order for VCs to achieve better returns, but also for long-term US equity performance. Just like much of the gains in US stocks over the past 10 years stemmed from tech companies created over a decade ago that eventually grew large enough to go public, the types of startups getting funded now should serve the same function in the years to come.
Wrapping up with a big picture observation: coders and startup founders have spent months adjusting to a new normal, likely thinking of novel ideas to address new ways of living, working and playing post-pandemic. It’s no coincidence that disruptive companies often sprout in recessions, because economic stresses force them to follow Clayton Christensen’s “Innovator’s Dilemma” playbook: successfully target the low end of a market and build up from there more efficiently than established players. That’s what Uber and Airbnb did to create the gig economy and give Americans new sources of income after the Financial Crisis. Now VCs will have to find the next tranche of startups to leverage new disruption and fund the opportunities that will come out of the latest crisis.