Venture Capital Benchmark

Q1 2020

North America, Europe and Latin America.

Welcome To The Status of Venture Capital Report for Q1 2020

Join us remotely February 22nd - 26th to learn how your startup can build a repeatable playbook to acquire, retain & grow customers.

We will be breaking down VC activity in the US, EU, and LatAm and what it means to you as an investor or founder. After going through extensive market intelligence from the industry's most trusted sources, here’s the top-line review of what went down in the VC world last quarter…

Q1 in a nutshell

Before COVID-19 (Q1 ‘ 20)

The market was in a post-WeWork saga, where investors were shifting from a ‘growth at all costs’ mentality to ‘growth with reasonable unit economics and a path to profitability’.

Before COVID-19 hit, round sizes and valuations were getting bigger and more expensive while the number of deals was shrinking.

Post COVID-19 (Q2 ‘ 20 onwards)

It Is Too Early To Show Any Meaningful Change In Q1’20 Due To COVID-19

So far in Q2 ‘20, the top 20 countries by GDP have implemented social distancing or quarantines, representing 80% of the global GDP. This reality — coupled with high levels of uncertainty — has forced venture capital funds to make significant changes to their strategy.

These changes will be materialized in Q2 ‘20 figures, but we can anticipate early-stage deals slowing down, funds lowering their investment pace, and company valuations taking a hit.

We Have Seen A Rapid Surge Of Activity In Some Verticals

While many pre-COVID-19 activities have significantly slowed or even completely stopped — such as travel and leisure — we have seen a rapid surge of activity in other verticals. Video Conferencing tool Zoom went from 10 million to 200 million daily meeting participants in just 3 months. Slack reported an 80% increase in paid customers from February 1st to March 25th. Microsoft teams reported almost 4x w-o-w growth in daily active users in March.

Accelerated growth in key verticals

COVID-19 Made Many People And Companies Realize That Technology Has More To Offer

This is causing an acceleration in growth and market penetration of verticals like e-commerce, education, health tech, artificial intelligence (AI), and cloud infrastructure.

Let’s Look At The Numbers….

What To Expect

A big slow down is coming.

Investments In Early-Stage Deals Are Expected To Slow Down

Due to the fallout from COVID-19 and the current economic climate. From a survey conducted by 500 Startups, 63% of VCs believe that COVID-19 will have a negative impact on early-stage investment activity in 2020. After a long trend of venture dollars chasing a few hot deals — giving the best founders the upper hand — we expect deal terms to shift back in favor of investors.

Uncertain capital calls.

Venture Capital Funds Will Slow Down Their Cash Deployment

Amid fundraising crunch and uncertain capital calls with LPs. From a survey conducted by NFX, 78% of VCs surveyed will slow down their capital deployment to 80% or below previous levels. As of today, U.S. VC firms have roughly $150 billion of dry powder available, down from $279 billion that they have raised since 2014. If they deploy $20 billion/quarter — down from $35 billion/quarter from pre-COVID levels — funds will extend their dry powder for an additional year.

Valuations will inevitably take a hit in the short/medium term

This is further accelerated by the public market crash which is causing revenue multiples to drop.

We are already seeing this across the board, with most valuations dropping by 20% or more.

Founders will be forced to rethink their strategy and become more cash efficient. As the new common saying goes, ‘runway is the new product/market fit’.

During the 08/09 crisis, median round sizes and valuations went down across all stages, to as much as 30% less due to market pressure.

We Foresee A Nike Swoosh Recovery In The Latter Half Of 2020

In term of downturns are always quicker than recoveries as wealth destruction, consumer fear and businesses take time to adjust and regain confidence. 63% of VCs surveyed believe that the impact of COVID-19 on early-stage investing could last between 1 – 2 years. Whereareas, 500 Startups survey point that 93% of VC thinks there’s a risk of recession.

Wait But, Innovation Loves A Crisis

While it’s easy to be concerned...

We Must Not Turn A Blind Eye On The Opportunities Being Created

We are all expecting the world to be forever changed after the pandemic. This will mean more opportunities for entrepreneurs eager to build new tools that help people adapt to a ‘new reality’.

Past Economic Recessions Served As A Launchpad For Some Of The World’s Most Successful Businesses Today

This includes Disney (founded in the Great Depression of 1929), Microsoft (oil crisis of 1975), and Whatsapp, Uber, Slack and Square (all founded in the Great Recession of 2008-09). It comes as no surprise that the best-performing vintages tend to be those that invest at the nadir of a downturn and into the early stage of recovery. For instance, 2009 is the first vintage since the 1990s where VC funds produced a median IRR in the double digits, and returns have remained strong for vintages through the 2010s as well.

Industries Taking Off As A Result Of COVID-19

Companies Are Accelerating Their Digital Transformation In Order To Survive

This has created a surge in demand for software tools that allows companies to reach consumers better and faster.

Investing in the businesses that can quickly capitalize on these changes

Below are some of the sectors we are paying close attention to as a new world is being shaped:

Work-from-home solutions

We are in the early stages of a transformational trend when it comes to remote work. This will grow exponentially in functionality and importance. This will play positively for productivity tools, cloud services and cybersecurity solutions.

Edtech is now going mainstream

We foresee an acceleration of adoption and utilization and a higher degree of consolidation in the market.

Telehealth is seeing a big boost

Driven by at-home confinement. We expect this to continue long after the pandemic once people realize the value provided by these platforms.

IoT

Population tracking software and analytics have been part of government responses to the virus, especially in Asia.

Virtual & Augmented Reality

As travel continues to see more restrictions, indoor/at-home entertainment is going to surge.

Humanless, Contactless technology

As the ‘new normal’ materializes, we expect an increase in demand for touchless devices such as digital contactless payments, facial recognition and voice-command devices.

We Encourage Founders To Think Of The Unimaginable

While it’s easy to be concerned...

Closing Thoughts....

Valuations will take a hit in the short/medium-term and most founders should expect at least 20-30% drop in valuations from pre-COVID level.

VCs are also slowing their investment pace amid fundraising crunch and uncertain capital calls with LPs.

At the same time, VCs are keen on verticals that are seeing a surge in growth and market penetration including e-commerce, EdTech, HealthTech, AI, and cloud infrastructure.

Founders should expect deal terms to shift back in favor of investors, particularly in early-stage VC.