It was perhaps the most unusual first quarter we’ve seen in a while as the COVID-19 pandemic threatened to put an end to the venture bubble many of us have been expecting to pop anyway.
Crunchbase projects $34.5 billion was invested in North American startups across all stages in the first quarter of 2020.
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This was up slightly (by 2 percent) year over year but surprisingly, 10 percent higher than the fourth quarter. Much of this increase we can attribute to funding in late-stage venture, which was up 24 percent quarter over quarter and year over year.
In general, since the second quarter of 2018 we have had a bull run in funding to startups in North America with each quarter projected above $30 billion.
The impact on funding from the COVID-19 pandemic is not yet showing in funding numbers, something we also saw when reporting on global projections. However, startups and well-funded unicorns have reacted instantly to the anticipated slowdown with hiring freezes (more than 50 percent of startups, according to NFX’s VC and Founder Sentiment Survey), layoffs and reductions in expenditure in anticipation of a challenging fundraising climate for the next couple of years.
However, there will be sectors that grow during this crisis. We are already seeing investments in startups that facilitate remote work and an increase in e-commerce and health care, particularly telehealth.
Many deals announced toward the latter weeks in March were negotiated in a very different business climate, and we expect the pandemic to have a negative impact on funding amounts in the quarters ahead.
“We have never before seen such a rapid decline in employment, the overnight shutdown of the economy, and simultaneously a large federal stimulus package with an apparently limitless appetite to spend,” he wrote via email. “Most venture capital investors are advising their companies to be prepared to make existing funds last at least 18 months to get through this period of uncertainty. Investors are spending time on their existing investments to shore up those companies and spending less time evaluating new deals.”
Bassett noted that at the seed stage, NextGen has not seen a huge decline in valuations. In many cases, companies are electing to reopen a prior round of investment (on the same terms) in order to close capital quickly and ensure enough runway to get through the next four to eight quarters.
“At the Series A stage and later, we are seeing a larger decline in valuations or more structure being put into deals that might have been struggling going into this pandemic,” he said.
Meanwhile, Aziz Gilani, managing director of Mercury Fund, acknowledged that it takes between 30 and 90 days for a VC fund to invest in a new startup, “so there is always a lag between a changing market and a change in funding behaviors.
“With that in mind, Q1 numbers shouldn’t be impacted by COVID, and the first impacts will be felt in the Q2 numbers,” he said.
Gilani predicts the initial reaction by VC funds will be to ensure their current portfolio companies have the balance sheets to withstand a 12- to 18-month slowdown.
“I’d expect to see the majority of funds increase their reserve ratios and reduce the number of portfolio companies they take on to do that,” he continued. “Funds that recently closed on new capital and don’t have a roster of current portfolio companies looking for cash are going to experience a fantastic buyers’ market, with valuations mimicking public markets.”
Next we looked at funding round counts, laying out totals for each of the past five quarters in the chart below.
Crunchbase projects 3,304 funding rounds for the first quarter of 2020 for the U.S and Canadian market. That’s up 9 percent compared to 3,033 deals announced in the fourth quarter of 2019, and 2 percent higher than the 3,232 deals announced in the first quarter of 2019. We break this down further in the following charts:
Angel/seed rounds made up the lion’s share of funding counts. Crunchbase projects $1.6 billion was invested in the first quarter of 2020–down 21 percent from the fourth quarter, but up 5 percent when compared to the first quarter of 2019.
Meanwhile, early-stage investment was up 5 percent to $12.3 billion compared to $11.8 billion in the fourth quarter of 2019. However, it was down 4 percent compared to the $12.9 billion in early-stage funding raised in Q1 2019. Projected early-stage funding counts were at a peak this quarter at just under 1,000 rounds.
Early-stage averages were up quarter over quarter and year over year, and settling for median over the last two quarters.
Late-stage funding is projected at $19.6 billion with the highest growth for both quarter-over-quarter and year-over-year funding totals at 24 percent.
As usual, a few massive rounds boosted investment totals. Waymo, the self-driving technology unit out of Alphabet, brought in the largest North American funding round for the quarter. It raised a huge $2.25 billion round from outside investors Silver Lake Partners, Abu Dhabi’s sovereign wealth fund Mubadala Capital and the Canada Pension Plan Investment Board. Other large raises included Vantage Data Centers’ $800 million round, Joby Aviation’s $590 million Toyota-led Series C and Impossible Foods’ $500 million round for its plant-based substitute for meat.
The median for late-stage rounds is consistent for the last four quarters at $40 million. Averages were up for the most recent quarter by 18 percent quarter over quarter.
Technology growth rounds track PE rounds in venture-backed companies. Quibi raised the large private equity round in the first quarter, with $750 million raised in advance of its launch of a new short-form streaming video service.
Exits have been strong this quarter with business cloud software provider Infor being acquired by Koch Industries for a rumored $13 billion, marking the largest exit in Q1. Notable fintech exits include free credit score company Credit Karma getting picked up by Intuit for $7.1 billion and Plaid by Visa for $5.3 billion.
The first quarter in 2020 funding in U.S. and Canadian startups stayed strong.
There will be a reset in the second quarter. However, this is a busy time in venture capital with firms assessing their existing portfolio companies’ strengths to weather a changed business environment, and looking for new opportunities should they have dry powder to invest.
We anticipate the crisis to be different from the dotcom bust of 2000 and the financial crisis of 2008. In 2000 the whole asset class was discredited with a collapse in dotcom technology stocks. In 2008 venture firms dialed back funding in a wait-and-see approach in anticipation of an extended global slowdown.
Since the beginning of 2019, more than $100 billion has been raised by Micro VC and venture firms across the U.S and Canada. This does not include all the alternative investors investing in this asset class. With multiple stage venture firms raising funds more often, there is no shortage of capital.
With trends toward digitization accelerated in finance, entertainment, commerce, work, health care, education and more–the opportunities for companies all the way from early-stage startups to large tech companies still exist.
About Projected Data:
There is often a delay between when a venture capital deal is closed and when it’s publicly reported and captured by Crunchbase. Accordingly, Crunchbase compensates for this pattern of delays by scaling reported (e.g. currently known and recorded in Crunchbase) data up in proportion to historical patterns of undercounting and late reporting.
It should be noted that the projections are based on historical patterns. The present environment is an outlier in terms of the rapidity in which certain sectors have experienced near total shutdown, financing plans have been curtailed and startups are cutting scale-up efforts due to concerns about capital availability amid the pandemic. We will be revisiting our projection methodology in coming weeks to determine if these factors, combined with a propensity for more timely reporting of closed financings, may contribute to overstating expected funding totals.
Glossary of funding terms
For reporting purposes, Crunchbase aggregates its funding data into “stages,” reflecting the different phases of private company development. Rounds are classified by stage according to the following sets of rules.
- Angel- and seed-stage are comprised of seed, pre-seed and angel rounds. Crunchbase also includes venture rounds of unknown series, transactions of undisclosed type and convertible notes totaling $1 million (USD or as converted USD equivalent) or less. Equity crowdfunding rounds with no listed dollar value, as well as those totaling less than $5 million, are also counted as seed-stage.
- Early stage is comprised of Series A and Series B rounds, as well as other round types. Crunchbase includes venture rounds of unknown series, transactions of undisclosed type and convertible notes totaling between $1,000,001 and $15 million. Convertible note rounds with missing dollar values are also counted as early stage.
- Late stage is comprised 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, transactions of undisclosed type and convertible notes of $15,000,001 or more.
- 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.)
Note: Fundings denoted by Crunchbase as corporate rounds are not included in Crunchbase stage classification metrics and therefore do not get included in annual and quarterly startup investment totals. In some instances, this will impact totals to a significant degree.
Illustration: Dom Guzman