After elevated venture capital (VC) investment in the past few years, deal activity maintained momentum in the first quarter of 2020 amid the impending economic downturn due to the COVID-19 pandemic, which will slow activity through the rest of the year, according to the PitchBook-NVCA Venture Monitor, the authoritative quarterly report on venture capital activity in the entrepreneurial ecosystem jointly produced by PitchBook and the National Venture Capital Association (NVCA), with support from Silicon Valley Bank and Carta. While the novel coronavirus has sent shockwaves through many areas of the economy, its full effect on VC deal activity has yet to be seen in the data. The early stage saw strong capital investment in Q1, continuing a decade-long rise that seems primed to subside due to the fallout from COVID-19. Many of the VC market dynamics that have supported large deals sizes (i.e. more mature startups, high capital availability) persist in the market today, but recent macroeconomic realities and widespread market volatility will weigh on dealmaking, suppressing deal valuations and shifting terms in favor of investors for the first time in years.
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Additionally, the VC market’s increasing reliance on large exits to return capital to investors has worked well during a steady and widening public market window, but it will be tested during the remainder of the year after COVID-19 uncertainty brought the long-running bull market to an end in March. On the performance side, VC funds have posted the best horizon IRR of any private market strategy in recent periods through mid-2019, but performance has been decreasing. As difficulties related to coronavirus linger, this downward trend could be sustained and will likely dampen the aggressive portfolio markups that have been behind much of the strength in recent short-term aggregate fund performance. When it comes to nontraditional investors, a distressed venture market could provide opportunity to private equity funds that are able to infuse portfolio companies with equity to sustain a downturn and emerge ready for growth when the economy rebounds.
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To download the full report and data packs, please click here. PitchBook and NVCA will also be hosting a webinar in partnership with Silicon Valley Bank and Carta on May 6, 2020 from 9:00 – 10:00 am PDT. Please click here to register.
“Despite these unprecedented times, the first quarter of the year saw healthy venture activity. That said, there are still uncertainties as to what the next few quarters of the year will hold as we navigate the coronavirus pandemic and its full effects on the venture ecosystem,” said John Gabbert, founder and CEO of PitchBook. “Although US VC dry powder sat at a record $121 billion as of mid-year 2019, suggesting that there is plenty of capital available for firms to weather the storm, VC firms will need to evaluate situations on an individual basis as differing aspects such as sector focus will largely determine their ability to support portfolio companies.”
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