Venture Capital Benchmark
Q2 2020
North America, Europe and Latin America.
## Welcome To the Status of Venture Capital Report Q2 2020
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Welcome to another issue of a series where we breakdown global venture capital activity and what it means for you as an investor or founder.
This brief is a digest of market intelligence from the industry’s most trusted sources, offering a bird’s eye view of the ever-changing venture landscape.
Q2 in a nutshell
Impact of COVID-19 to-date (Q2 ‘20)
As expected, VC investments have not been immune to COVID-19. The impact was felt mostly in terms of deal count as total amount invested held strong, particularly in the US and Europe.
Deal count was already downward
And COVID-19 Sharpened The Trend
With 20-30% less deals in Q2 ’20 vs. last quarter (See charts below). This trend is especially sharp in early stages. For reference, 1st round investments were 35% of deals in Q2’19, vs 20% in Q2’20 (Pitchbook). This is likely due to a high uncertainty environment.
Total amount invested...
Held Strong In The US And Europe
Although it has shifted more towards later-stage deals. While they have seen less investment in Q2 ’20 than in the same period last year, they have seen growth vs. Q1’20.
LatAm has been hit much harder, however, with an 80% decrease in total dollars investment vs. Q2 ’19 and by 28% vs. last quarter.
Average ticket size increased as expected
In The US And Europe, It Had Been Increasing With Respect To Last Year
Along with the decline in nº of deals, and it was no different in Q2 ‘20. In fact, it has increased slightly with respect to Q1 ‘20. Average ticket size has only declined in LatAm, where there are less late-stage companies.
Let’s Look At The Numbers….
What To Expect
Winter is coming
Actually… Not Yet
In our last issue, we predicted that Venture Capital funds would slow down their cash deployment. But, as you saw earlier, this hasn’t technically been the case in terms of total dollars invested.
Public Markets Are Like Freshmen At Spring Break
Although initially thought of a virtual impossibility, the US equity markets have hardly flinched. As of July 9, Dow Jones is only down 9% while S&P 500 has pretty much recovered its losses for the year (down <2% YTD) while the tech-heavy NASDAQ is off to the races with +17% YTD.
Private Markets Still Continue To Show Plenty Of Forward Momentum
Back in March, we were looking at US public markets down nearly 40% from its February peak. Most had assumed that liquidity for venture funds and companies would dry up for the remainder of 2020. While capital markets are still down from the 2018/2019 high water points, there are clear signs that capital has not dried up in the way we predicted.
How Does It Affect VCs?
So Far VCs Continue To Write Lots Of Checks
and if VC opinions are to be believed, they have no plans to significantly slow down their cash deployment. As per the results of VC survey below, 56% of the VCs have no plans to slow down their dry powder deployment by more than 20% from pre-COVID levels, compared with 58% in Q1.
Capital has shifted
And It's Moving To Fewer And Bigger Deals
This has created a surge in demand for software tools that allows companies to reach consumers better and faster, to guarantee the most efficient route from warehouse to home, to enhance teams’ productivity and communication while being remote.
It Particularly Makes Sense For Early-Stage Investing
As it generally focuses on 5-8 year time horizons. The best-performing vintages tend to be those that invest at the nadir of a downturn and into the early stage of recovery.
Founders are hedging their fundraising bets
Another trend we are seeing now at early stage investing is that founders are running dual capital raise processes to see which gets traction:
Seed Stage → founder raising a $2-3m “seed” or a $500-750k “pre-seed”
Series A stage → founder raising a $3-$5m “Series A” or a $500-$1M ‘bridge’
This is a smart strategy that we wholeheartedly support. Any good founder should know best as to the minimum investment needed to de-risk their business, not VCs.
Confidence Of LPs Who Are Already Invested In The VC Asset Class Remains High Across All LP Categories
LPs seem excited about allocating today vs. pre-COVID-19, particularly due to the expectations of lower valuations and a belief that the pandemic dramatically has accelerated the trajectory of the innovation curve.
What Does It All Mean For Founders?
What we are seeing in the early stage fundraising landscape is that it’s a great time for founders to raise and for VCs to invest. If you’re even thinking about raising at all between now and Q1 ‘21, raise at least a little bit now to weather uncertainty.
Where Does This Leave Valuations?
VC Valuations Held Up Strong In Q2’ 20
This was mainly driven by an increase in late-stage valuations and stable early-stage valuations. However...
VCs Report That They Have Seen Lower Valuations Since The Pandemic Began
In the US, 60% of VCs have reported to see valuations drop by 20-30% as a result of COVID-19.
If you’re a well-connected founder
It Is Likely That Your Valuation Won’t Drop Significantly
The drop in valuations will probably affect most companies that have raised last year.
One thing we can say for sure
In Three Months Time, Things Will Look Very Different Than They Do Now
So if you are thinking about raising funds, it would be in your best interest to raise now. We predict that the early stage fundraising markets will be good for at least the summer.
COVID-19 Has Accelerated Pre-Existing Tech Trends
The general theme
B2B Startups Are Seeing Stable Revenues
Or even seeing a revenue uptick because the rate of software adoption in legacy businesses has been accelerated 3-5 years. The next few years will result in a lot of old, legacy businesses that have shunned innovation with ineffective leadership being left behind.
Opportunities catalyzed by COVID-19
Healthcare
Naturally, there has been very relevant movement in startups tackling pandemic response. The telemedicine adoption curve was pushed up by years. Telehealth visits in the US could top 1 billion this year.
Digitization
In a pandemic-struck world, services that require human contact have had to adapt to the situation through digitization of these services.
Automation
Boston Dynamics and Brain Corp are seeing surges in demand for robots that can do dull, dirty, and dangerous tasks.
Supply Chain (Shipping and logistics)
Tech is going to drive the new supply chain world. Robotics and AI will bring things locally much faster. This is a massive space where even a small market share in sub-verticals can have really big outcomes.
Vertical Deep-Dive: Online Groceries And RetailTech
On the demand side
Online Grocery Shopping Is Continuing To Reach Even Higher Numbers
Supply is also increasing
For Us As VCs It Means That...
We are particularly interested in startups that are helping established retailers accelerate their efforts to make shopping online even more seamless.
What Does It All Mean For Founders?
What we are seeing in the early stage fundraising landscape is that it’s a great time for founders to raise and for VCs to invest.
Worse growth prospects, and high uncertainty environment hammering deal count, particularly in early-stages. Capital has shifted more heavily towards later stage deals.
Contrary to popular belief, LPs familiar with VC remain confident and open to allocate due to lower valuations and digital acceleration across all verticals.
Early-stage founders should consider running dual capital raise processes to see which gets traction.