Funding to North American startups did not slow down in the just-ended quarter. In fact, deal-making at the later stages picked up, as did big-ticket acquisitions and public market debuts for a slew of heavily funded venture-backed companies.
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Overall, venture investors put $35.7 billion into seed- through growth-stage funding rounds for North American startups in the third quarter of 2020, according to preliminary data from Crunchbase. That marks a 9 percent rise from Q2 funding totals and a 2 percent gain from year-ago levels.
In short: Predictions the COVID-19 pandemic would lead to a sharp pullback in North American startup investment have not come to pass.
Among startups raising funding in recent weeks, a common refrain is that the rise in remote work, education and commerce driven by the pandemic has accelerated broad societal shifts already underway. As a result, companies focused on spaces such as distance learning, remote collaboration and telemedicine are seeing a sharp rise in funding, even as other sectors may be contracting.
Seed- and early-stage dealmaking, meanwhile, was down in Q3, according to end-of-quarter data. However, those totals are expected to rise as late-reported rounds enter the database.
While money kept flowing into startups, investors also saw some big returns from acquisitions and public offerings. On the M&A front, we saw a spate of deals at prices over $1 billion, topped by Illumina’s $8 billion acquisition of its former spinoff Grail, a cancer-screening unicorn. It was also a big quarter for public-market debuts, led by headline offerings from Snowflake, Palantir and Unity.
We dug into the numbers in more detail, focusing on round counts and investment totals at each stage, as well as action on the exit front.
The big picture
Let’s start by looking at overall funding across stages, laid out in the chart below.
The bulk of venture capital funding went to later-stage rounds (Series C and beyond), so we’ll focus on this area first.
In Q3 2020, investors put $21.1 billion to work across 228 deals; the highest investment total and the second-lowest round count total of the past five quarters.
What’s going on here? In two words: Supergiant rounds. In Q3 2020, North American companies closed on 56 so-called supergiant rounds of $100 million and up (see list), per Crunchbase data. That’s up from 42 in the prior quarter and 45 in the year-ago quarter.
There was no single industry that dominated the ranks of big check recipients. The largest rounds included the aforementioned Bright Health and Affirm (now en route to IPO), along with online bank Chime, stock trading platform Robinhood, and connected fitness startup Zwift.
The robust IPO market probably contributed to the late-stage spending spree. Enormous market caps attached to Snowflake and other IPO debuts helped assuage private-investor fears about public markets supporting high valuations for money-losing unicorns.
Technology growth-stage investment totals and round counts were all also up in Q3, as illustrated in the following chart.
Historically, technology’s growth stage is our most volatile category. Since there are fewer deals at this stage—and they skew on the large side—one or two really big ones can heavily affect quarterly totals.
That’s what happened in Q3: A single $2.5 billion round for Rivian led by T. Rowe Price, accounted for more than half the quarterly total.
Early-stage investment (Series A and B), meanwhile, was a bit more muted in Q3 2020, according to preliminary reported data.
Based on that reported data, investors put $9.2 million into 526 known early-stage funding rounds in Q3. That’s down from the $11.9 billion Q2 total and the $10.8 billion total from Q3 2019. The chart below breaks out the last five quarters.
We’re not going to make too much about the top-line numbers. A nontrivial percentage of early-stage rounds get reported after the quarter ends, so the total should rise as more late-reported rounds enter the database.
Instead, we’ll look at where the money went in Q3. Life science and health care accounted for more than 40 percent of the funding total, and enterprise software and ed tech saw elevated levels of investment, per preliminary data.
As usual, a few really large rounds lifted the totals. Those rounds include: a $257 million Series A round for Thrive Earlier Detection, a cancer diagnostics startup; a $240 million Series B for Nuvia, which focuses on high-performance silicon design; and $145 million in Series B funding for Rippling, an online platform for HR.
North American seed-stage dealmaking also held up in Q3, with $1.4 billion invested across 1,048 known rounds, per preliminary Crunchbase data. We look at round counts and dollar totals across the past five quarters in the chart below.
Since a sizable portion of seed-stage deals are reported after the quarter ends, we’ll avoid making too much about the top-line number. Top sectors for seed-stage investment in Q3 included fintech and financial services, health care, life sciences and e-commerce. Finance startups in particular have seen a sharp year-over-year increase in seed funding, aided no doubt by the industry’s impressive track record for creating unicorns.
The median seed round was $760,000 in Q3. However, there were a few substantially larger deals, including $20 million for biotherapeutics developer GentiBio, $16 million for ed tech startup ClassEDU, and $14 million for mail-tracking provider Oyster.
The third quarter stood out as unusually robust for exits. Public offerings in particular were on a tear, with highly valued unicorns opting for either a traditional IPO or a direct listing.
IPOs and direct listings
The IPO window was wide open, and hot companies that made it to market were rewarded with market caps in the billions or tens of billions of dollars.
The leader of the pack was data warehousing company Snowflake, with a record-setting software offering that raised $3.4 billion, and a recent market cap around $70 billion. Overall, more than 10 North American venture-backed companies that went public in Q3 closed out the quarter with market caps in the billions of dollars.
We put together a full list of venture-backed companies that went public in Q3 here. In the chart below, we look at the biggest debuts.
A bullish IPO climate doesn’t always coincide with a hot M&A market. When unicorn valuations get bid sky-high, acquirers can be reticent to pay those prices.
That didn’t happen in Q3. While public investors pushed up shares of market newcomers, the acquiring companies wrote some pretty hefty checks for private companies.
Crunchbase data shows several acquisitions of venture-backed companies for $1 billion or more, including two valued at over $7 billion: Grail and ZeniMax. We lay out the largest announced deals in the chart below.
The big picture
To sum up where we are in Q3 2020, here goes:
Many close observers of the North American startup funding ecosystem have been waiting a long time for the big slowdown. It hasn’t happened. It’s unclear when or if it will happen. For those who’ve been talking about an eventual slowdown (myself included), it’s predicated on a few notions:
- Liquidity and fundraising for startup investors would dry up.
- Private investors would balk at continued sky-high valuations.
- Public investors and acquirers would refuse to uphold lofty private valuations.
None of those things have happened. And rather than merely mirror sky-high private valuations, public markets have bid up hot companies like Snowflake higher than imagined.
One might envision the global spread of a terrible new disease could depress things some, but we’re nine months into a pandemic and that hasn’t happened.
At this point, the unicorn bull market is looking more like a raging bull market. Yes, it can be stopped, but not easily.
Glossary of funding terms
Seed and angel consists of seed, pre-seed and angel rounds. Crunchbase also includes venture rounds of unknown series, equity crowdfunding, and convertible notes at $3 million (USD or as-converted USD equivalent) or less.
Early-stage consists of Series A and Series B rounds, as well as other round types. Crunchbase includes venture rounds of unknown series, corporate venture and other rounds above $3 million, and those less than or equal to $15 million.
Late-stage consists of Series C, Series D, Series E and later-lettered venture rounds following the “Series [Letter]” naming convention. Also included are venture rounds of unknown series, corporate venture, and other rounds above $15 million.
Technology growth is a private-equity round raised by a company that has previously raised a “venture” round. (So basically, any round from the previously defined stages.)
Illustration: Dom Guzman