The Q1 2020 Global VC Report: Funding slowly impacted by coronavirus

Editor's note: this is an article from Crunchbase News syndicated with permission, and written by research lead Gené Teare and reporter Joanna Glasner

It’s been a long time coming. For the last two years we have experienced a bull run in funding to startups. Per Crunchbase data, 2018 was the peak year for global investment, with 2019 the second-highest for invested dollars in startups in the last decade.

Over the course of last year, China pulled back substantially, the U.S. was down a bit, Europe grew and Latin America’s investment rose as well.

Against this backdrop of unprecedented funding amounts in the last 24 months–with more than 25,000 startups funded annually–we face the biggest downturn since the financial crisis of 2008.

By our counts 5,000 to 7,000 startups per quarter dependent on venture funding to grow are immediately impacted. Startups in last-mile mobility, travel, hospitality and other sectors have seen their markets wiped out overnight. Reports are circulating of crisis fundraising to stave off bankruptcy by unicorn startups with business models geared for growth.

In the first quarter we have begun to see global invested amounts come down, with distinct trends in different regions based on the timing of shelter-in-place orders and the spread of COVID-19.

For China, we identify an accelerated slowdown in Q1 2020. Europe posted a slower decline, and the U.S. and Canada showed growth quarter over quarter, but less so year over year. Many deals announced in the last weeks of March–since shelter-in-place regulations were enacted in the U.S., Canada and Europe–were negotiated in a very different and more bullish investment climate.

In the second quarter we do expect a more pronounced reset due to the coronavirus pandemic.

Below, we take a look at trends for the first quarter across a range of metrics focusing on investment totals (Money In) and exits (Money Out).

Money In

Pace of dealmaking

Crunchbase projects 7,600 venture rounds generated in Q1 2020, down from the last quarter by 5 percent and down year over year by 4 percent. Since the first quarter of 2018, total projected venture deal volume has been above 7,000 rounds per quarter peaking at around 8,500 in the second quarter of 2019. That makes 7,600 rounds the lowest projected count in the last five quarters.

Projected VC dollar volume

Next up we look at overall projected invested dollars. Crunchbase projects that around $63.8 billion was invested worldwide in Q1 2020, down from the last quarter by 17 percent and down year over year by 8 percent. This is projected to be the lowest amount going back for two years in venture funding with the peak happening in the fourth quarter of 2018 at $83.6 billion.

North America’s proportion

For this most recent quarter, with overall deal counts down, the geographic split between the U.S. and Canadian market versus the rest of the world has shifted. The U.S. and Canada represent a larger slice of deal volume in the most recent quarter, coming in above 40 percent.

For this most recent quarter, with overall invested dollars trending down the U.S. and Canadian market grew. The two countries represent a larger slice of dollar volume in the most recent quarter, above 50 percent relative to other regions; the highest percent in the last five quarters.

Next we look at funding by stage, from seed through late-stage funding, to understand the dynamics at each funding stage in the last quarter relative to the previous four quarters.

Stage-By-Stage Analysis of Q1 2020 VC Funding Trends

Angel and seed-stage deals

Crunchbase projects that approximately $3.3 billion was invested across 4,896 deals in Q1 2020 in seed-stage deals. Seed-stage rounds include angel, pre-seed, seed and a subset of rounds below a certain threshold. This represents the lowest amount invested in seed-stage rounds for the past two years, with the largest drop at 27 percent in dollars invested quarter over quarter.

Early-stage deals

Early-stage deals include Series A and B rounds and a mix of undisclosed venture rounds below a certain amount. See our methodology section for more details.

Crunchbase projects that $22.3 billion was invested across 2,170 deals in the first quarter. Count and amounts are down across the board with the most significant drag on quarter over quarter dollars invested down by 23 percent, marking the lowest recorded quarter since the fourth quarter of 2017.

Early-stage deal averages came down quarter over quarter, but the median trended up quarter over quarter.

Late-stage deals

Late-stage deals include Series C+ rounds as well as a subset of larger nondesignated venture rounds. Crunchbase projects that $36 billion was invested across 502 deals in the first quarter in late-stage venture rounds. This is down quarter over quarter and marginally up year over year.

For late-stage rounds we see a settling of median and average from the high point of the fourth quarter of 2019.

Technology growth rounds are private equity rounds in venture-backed companies. We include these to more accurately represent late-stage funding for venture-backed startups. Crunchbase projects that $2.2 billion was invested across 30 deals in the first quarter in technology growth rounds. This is the investing stage with the largest pullback year over year, at over 50 percent. It’s also the category that sees the highest volatility, as the presence or absence of a few huge deals can heavily skew the totals.

Money Out

Venture-backed acquisitions

Acquisition activity was down in Q1, based on reported data. A total of 325 venture-backed companies globally sold to acquirers in the quarter, bringing in at least $30.4 billion in proceeds. (Since a large portion of deals do not have a reported price, the actual totals are higher, but unknown.)

While $30.4 billion sounds like a big number, it’s actually a steep decline from Q4, during which there were 353 known acquisitions bringing in a reported total of $59.4 billion. As illustrated in the chart below, Q1 stands as the second-weakest quarter of the past five for venture-backed M&A deals:

A few really large deals helped boost the Q1 totals. Fintech in particular was hot, with Intuit’s $7.1 billion purchase of consumer credit portal Credit Karma ranking as the most expensive venture-backed M&A deal, followed by Visa’s $5.3 billion purchase of payment technology provider Plaid.

Other big deals include Salesforce’s $1.32 billion purchase of  mobile software provider Vlocity, and buyout firm Hellman Friedman’s $1.15 billion buy of application security provider Checkmarx.

Notably, we didn’t see startups out of Asia on the largest M&A deals list. The coronavirus outbreak in China, which began escalating in January, is potentially a contributing factor.

Initial public offerings

Despite hopes that 2020 would be a big year for unicorn market debuts, the pace of IPOs was slow in the first quarter.

For Q1 2020 we record 23 venture-backed companies that went public. This is down quarter over quarter and year over year by over 50 percent. Thirteen of the 23 companies are in the biotechnology or health care industry. Larger offerings included One Medical, a provider of physician clinics focused mostly on primary care, and Revolution Medicines, a developer of novel therapies for cancer treatment. Casper, a mattress company backed by  IVP, NEA and Lerer Hippeau was one of the much-awaited venture-backed offerings, but has posted weak aftermarket performance.

Conclusion

The first quarter in 2020 is down for seed- and early-stage deals. We expect this to deepen in the second quarter as venture capital firms reassess their existing portfolio funding needs and reevaluate companies pitching for funding in this massively changed economy.

Late-stage deals, which can fluctuate to a greater degree, will also be hit in the next quarter as alternative investors, investment banks and private equity firms, along with venture, assess their portfolio companies against the backdrop of an unstable stock market.

Should shelter-in-place orders be eased up by the third quarter–based on the past financial crisis–it could take two years or more to get back to pre-crisis funding levels. The bigger question for us as a society is how we recover and support those with lost businesses and lost jobs through the crisis.

Methodology

The data contained in this report comes directly from Crunchbase, and in two varieties: projected data and reported data.

Crunchbase uses projections for global and U.S. trend analysis. Projections are based on historical patterns in late reporting, which are most pronounced at the earliest stages of venture activity. Using projected data helps prevent undercounting or reporting skewed trends that only correct over time. All projected values are noted accordingly.

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.

Certain metrics, like mean and median reported round sizes, were generated using only reported data. Unlike with projected data, Crunchbase calculates these kinds of metrics based only on the data it currently has. Just like with projected data, reported data will be properly indicated.

Please note that all funding values are given in U.S. dollars unless otherwise noted. Crunchbase converts foreign currencies to U.S. dollars at the prevailing spot rate from the date funding rounds, acquisitions, IPOs and other financial events are reported. Even if those events were added to Crunchbase long after the event was announced, foreign currency transactions are converted at the historic spot price.

Glossary of Funding Terms

• Angel & Seed-stage is 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 $15,000,000. 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 ” 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