Covid-19 and US Venture Capital in 2020
One could likely dedicate an entire history book to all that has happened in 2020. COVID-19 alone has taken all too many loved ones from people across the globe. Attempts to flatten the devastating curve have included unprecedented mandates restricting in-person business for varying periods of time, amongst many other new regulations as well. This new world has forced many new adaptations and innovations, but what has this meant for those in VC who circled themselves around new trends and innovations long before 2020? Ultimately the last 12 months have included struggles and contraction, but it appears this group et large has regained losses quickly and found good fortune and strong paths forward in the face of this pandemic.
The Overall Space
Similar to other spaces across the globe, the initial state of emergency regarding Covid-19 in the United States brought heavy concerns for those in venture capital. Jonathan Simnett from corporate law firm Hampleton Partners was reported saying, “[t]he brakes have been slammed on funding until investors are able to create maps to navigate uncharted territory” [4]. Larry Bohn from VC firm General Catalyst was referenced by MIT acknowledging “the mood is pretty gloomy” [13]. Among other sources it was also clear that, although VC investors generally sought optimism, there was concern and a fairly consensual expectation of contraction [2]. With time, decline is precisely what was observed. According to analysis from PwC and CB Insights, Q2 2020 showed a 9.6% YoY decline in the total monetary value of VC investments compared to Q2 2019 and an 18.0% YoY decline in total deal numbers [12]. However, similar to the sentiment from Jonathan Simnett, this trend began to reverse in Q3 2020, with numbers up 22.5% YoY in total value compared to 2019 and down only 11.3% in number of deals.
As we moved from Q3 to Q4 2020, this strength only continued. First, VC investors remained confident in their previous investments. In September 2020, the National Bureau of Economic Research released a working paper including an industry survey citing 900+ VC firms; this paper revealed a consensus that many portfolio companies were performing quite well in the face of Covid-19 and less than 10% were performing at levels that would raise significant concerns [3] [10]. Second, the IPO market, a key exit avenue for VC investments, proved increasingly strong and resilient throughout the year. WiMi Hologram Cloud (NASDAQ: WIMI) was the first IPO after the S&P 500, NASDAQ, NYSE and Dow Jones Industrial Average reached their respective 52-week lows on March 20, 2020, but this proved only the beginning of IPOs in the Covid-era portion of 2020 [14]. Many watched most recently as DoorDash (NYSE: DASH) and Airbnb (NASDAQ: ABNB) made their public debuts on December 9th and December 10th respectively. These were just a few of many strong IPOs seen this year. As of December 23rd, 2020, US stock markets saw 477 IPOs, more than doubling the 233 IPOs from 2019, at least 120 of which were venture-backed [14] [11]. Those VC-backed IPOs held a combined $259.8 billion in pre-valuation at the time of their IPO, a new record [11]. Finally, total VC deal value continued to show promise. As of December 14th, 2020, US VC deal activity was at $147.9 billion, up 7.5% from 2019 [11]. This did occur amidst a 15% lower deal count than 2019, but it showed that investors were still willing to invest their money, even if they were being more selective.
The “Pandemic-Friendly” Divide
There were some specific aspects of Covid-19 that allowed Venture Capitalists as a group to show resilience. Unlike the early 2000s which saw a “loss of confidence in the very idea of digitizing the economy” coupled by a 50% fall in VC investments, part of the reason VC adjusted so favorably to the pandemic-controlled environment was because the majority of VC investments had long revolved around pandemic-friendly spaces [3] [10]. “Pandemic-friendly” here is referring to spaces that could either help stop the pandemic (i.e. healthcare) or help life go on in spite of a pandemic (i.e. software, communication, etc.). Looking at data published by PitchBook on July 24, 2019, software has been ~40% of VC deals in the United States with healthcare close by at ~20% for the past 7+ years [6]. As we saw in the S&P 500, where the index et large regained pre-Covid highs by August thanks largely to just a handful of tech giants, it has definitely been possible for these pandemic-friendly companies to skew overall data [5]. Comparatively, the fact that pandemic-friendly companies have been a majority of VC investments for some time now has made their growth much less of an outlier and much more indicative of the overall VC environment. Nonetheless, it is still important to ask the question: what about the VC funds that historically centered themselves around non-pandemic-friendly industries?
To answer, it’s been hard. Although much of VC saw better than average trends in the face of Covid-19, this corner saw things become much worse. TripActions, Inc., an Andreessen-Horowitz backed corporate travel management startup, was one that had to lay off hundreds of employees almost immediately in the early months of the Covid-19 pandemic [1]. According to PitchBook, JetBlue Technology Ventures, an airline-owned VC group, made only 1 investment between March and December 2020. This sole investment was a follow-on round for i6 Group, a fuel management company which they first supported pre-Covid in January of 2020 [7]. Unlike other airline associated venture capital groups such as Lufthansa Group’s Lufthansa Innovation Hub, which make VC investments somewhat rarely, JetBlue Technology Ventures made 6 VC investments between March and December of 2019, making their decline this year all the more pronounced [8]. According to Crunchbase in June 2020, the number of VC-backed seed to Series B travel deals in the US dropped from 15 deals in Q2 2019 to 3 deals in Q2 2020, and the average check size for series A travel tech investments declined from $14.68 million to $2.3 million [9]. This drastic decrease in deal volume came without any increase in deal size to make up for it, opposing trends observed in the overall VC market. Similar trends were seen in the restaurant and hospitality sectors. Rosser Capital Partners, Enlightened Hospitality Investments, and Kitchen Fund were some examples of restaurant/hospitality-focused investment funds that, despite regularly making past investments, did not place an investment in Covid-era 2020 (with the exception of the Kitchen Fund participating in the buyout of the Sustainable Restaurant Group). In addition, KarpReilly was a fund that continued to make investments however even they did not invest in any new restaurant chains in 2020 (something they had done in 6 of the last 7 years, with groups including Cafe Zupas, Pitfire Pizza Company, and Picnik Austin). This is not intended to be an exhaustive list of VC groups that faced changes and difficulties in the face of Covid-19, but rather these examples simply illustrate broader trends witnessed throughout travel, restaurant/hospitality, and non-”pandemic friendly” VC groups and companies overall.
Conclusions
Ultimately, it seems that the unique aptitude Venture Capital has possessed for tech-facing investments for some time now largely positioned them well in the wake of Covid-19. While other groups and industries were still facing losses, Venture Capital managed to pull off one of its most successful years yet. This doesn’t mean that every VC firm or VC-backed company has faced glowing success over the last 12 months (or been immune to intense struggle), nor does it mean that Venture Capital will always be so resilient in the wake of a recession. However, it does mean that Covid-19 appears to have brought perhaps the exact opposite of the long-lasting software-innovation-stifling era we witnessed following the dot-com burst in the early 2000s.
Sources
[1] Chernova, Y. (2020, March 25). TripActions Lays Off Hundreds of Employees Amid Coronavirus. Retrieved January 3, 2021, from https://www.wsj.com/articles/tripactions-lays-off-hundreds-of-employees-amid-coronavirus-11585084870?mod=article_inline
[2] Cook, J. (2020, May 6). U.S. venture capital activity nosedives in April, but Washington state’s numbers aren’t too bad, yet. Retrieved January 3, 2021 from https://www.geekwire.com/2020/u-s-venture-capital-activity-nosedives-april-washington-states-numbers-werent-bad/
[3] Gompers, P., Gornall, W., Kaplan, S. N., & Strebulaev, I. A. (2020, September). Venture Capitalists and Covid-19. Retrieved January 3, 2021, from https://www.nber.org/system/files/working_papers/w27824/w27824.pdf?utm_campaign=PANTHEON_STRIPPED&%3Butm_medium=PANTHEON_STRIPPED&%3Butm_source=PANTHEON_STRIPPED
[4] Loten, A. (2020, March 25). Startup Funding Dwindles Due to Coronavirus Slowdown. Retrieved January 3, 2021, from https://www.wsj.com/articles/startup-funding-dwindles-due-to-coronavirus-slowdown-11585175702
[5] Lynch, D. J. (2020, August 20). Rising stock market would be in the red without a handful of familiar names. Retrieved January 3, 2021, from https://www.washingtonpost.com/business/2020/08/19/tech-stocks-markets/
[6] Mathur, P. (2019, July 24). 21 charts showing current trends in US venture capital. Retrieved January 3, 2021, from https://pitchbook.com/news/articles/21-charts-showing-current-trends-in-us-venture-capital
[7] PitchBook. (2020, December 22). JetBlue Technology Ventures. Investors Profile. Retrieved from PitchBook database.
[8] PitchBook. (2020, November 12). Lufthansa Group. Investors Profile. Retrieved from PitchBook database.
[9] Sagie, I. (2020, June 23). How COVID-19 Changed The VC Investment Landscape In The US. Retrieved January 3, 2021, from https://news.crunchbase.com/news/how-covid-19-changed-the-vc-investment-landscape-in-the-us/
[10] Simmons, L. (2020, September 22). VCs and COVID-19: We’re Doing Fine, Thanks. Retrieved January 3, 2021, from https://www.gsb.stanford.edu/insights/vcs-covid-19-were-doing-fine-thanks
[11] Thorne, J., & Mathur, P. (2020, December 21). The year in charts: VC defies 2020 expectations despite the pandemic. Retrieved January 3, 2021, from https://pitchbook.com/news/articles/2020-vc-in-charts
[12] Venture Capital Funding Report Q3 2020 (2020). Retrieved January 3, 2021, from https://www.cbinsights.com/research/report/venture-capital-q3-2020/
[13] Vereckey, B. (2020, April 22). 5 trends in venture capital (beyond the pandemic). Retrieved January 3, 2021, from https://mitsloan.mit.edu/ideas-made-to-matter/5-trends-venture-capital-beyond-pandemic
[14] 2020 IPOs (2020). Retrieved January 3, 2021 from https://stockanalysis.com/ipos/2020-list/
Charlee Wambolt contributed to this report.
- Covid-19 Impact on US Private Capital Raising Activity in 2020 - May 27, 2021
- Healthcare 2021: Trends, M&A & Valuations - May 19, 2021
- 2021 Outlook on Media & Telecom M&A Transactions - May 12, 2021
