Venture Capital & CVC Activity: Covid Review

Covid was deemed a national pandemic in the US on March 11th, 2020. Ten days ago as of this post. The gut reaction to many startups was visible. As in any business model under duress (especially startups) marketing stops, then recruiting slows or stops, followed by letting individuals go who may have already been planned to be (or were lower performers). None of it is desired and a lot of undeserving, well performing talent is affected. It although is important that outgoing cash flow be curbed for non-essential operations, and ROI continues growing. Especially in venture funded companies – where they routinely operate unprofitably until scale is reached. Some broad based takeaways I find to be are:

  • Since the year passed, 615 startups laid off more than 87,000 employees. (Check out layoffs.fyi.)
  • Transportation, travel, and retail sectors were hit the hardest. Unsurprisingly.
  • During 2020, deal count was lower than in past years, but the volume of capital increased (fewer, but larger deals). This could be attributed to many macro factors, the Fed’s printing of money being a large facet of the equation.
  • Startups began to raise larger rounds to aid in the padding of their balance sheets. It would have been normal for rounds to fund a company for 18 months. Now some are raising for 24 months of padding.
  • M&A does not seem to have been affected. While the value of the transactions increased comparably over past years. Volume did two.
  • Corporate Venture Capital was not affected. CVC teams participated in more rounds, as well as deployed more capital compared to any previous year.

For venture capital firms, the story was a bit different. They kept writing checks, closing funds, and raising. Although the way the work happened was different. It’s important to highlight that normally venture-backed businesses run unprofitable, hence the need for funding from an outside source. So the two were affected differently, even though there’s a symbiosis between them (i.e., VCs and startups). Cash is needed, and they’ve got the cash. As you’ll see below, there already has been a bounce back into the levels of capital being deployed and the slowdown of layoffs.

Q42020 NVCA Venture Monitor

As part of an after action review, Summer of 2020 felt differently in Startup Land: layoffs, budget tightening, and remote work were the key themes.

  • Startups were still raising capital (VC’s signing checks), growth-stage companies were still being purchased, and employees were being laid off:
    • Monzo raised $69.5m, but at a 40% lower valuation than its prior round
    • Personal Capital was acquired by Empower (who after ten years was still unprofitable with $12.3bn AUM)
    • There were 4x as many job searches for laid-off engineers as there are for the next most popular function (design)
    • Former tech employees of Toast, Uber, and Airbnb were the most sought-after startup employees on recruitment sites (given reputation). Although this coincides in them conducting widespread layoffs.
    • It was reported that by July, over 100 tech startups conducted layoffs despite receiving loans through the PPP (ConsenSys, Lighter Capital, and Quantcast to name a few). But 72 of those companies started before receiving the loan.
    • Over 8,000 privately backed companies received billions in PPP loans. And some of these companies still went bankrupt.
    • These days the ecosystem is back (or close) to pre-pandemic levels. Companies layoffs have slowed, rounds are closing at all time highs, and VCs are raising.

As part of an after action review, Summer of 2020 in Venture Capital Land: deploying capital, raising funds, and not always needing to take a flight to meet founders before committing:

  • Overall capital deployed increased marginally compared to Q1, but total deals executed continued to drop. The first half of 2020 was lower in volume compared to the last three years, but the number of transactions was higher.
  • (Seed) Partech closed a $100m fund to invest in a post-Covid future
  • (Series A & B) Multiple rounds continue to close: Plum (money management) raised $10m, MoneyBox raised $35m
  • (Growth) Insight closed a $9.5bn fund to specifically support their startups and scale-ups through Covid
  • VCs continued to invest in companies without ever meeting the teams. Although, some still were meeting face to face before committing to investing.
  • Angle stage investors participated less so than normal, which is expected given most of that type of capital is personal vs. dedicated funds.

Additionally in the equation of VCs + startups, the M&A market fared much better. As you see below, the estimated deal count dipped during Q1 and Q2 of 2020, but the value of exits increased thanks to a few large transactions. This is not surprising, as one could expect small to mid-market M&A transactions to increase during times of difficulty (no thanks to Visa + Plaid). Startups, or small to mid-sized organizations who were already planning on selling could feel the need to ‘do it now’, or those companies that had not been planning to could instead have been forced to given changes in incoming revenue because of Covid. It is worth noting that the stronger (smaller) companies would choose to postpone until the market is healthy again, choosing not to sell during times of such drastic market fluctuations. Large incumbents with healthy balance sheets can (and did) execute on those opportunities. And they did.

Q42020 NVCA Venture Monitor

Reviewing corporate venture capital (CVC), both the participation and amount deployed increased. CVC’s participated in 25.7% of all deals, while the group accounted for 47.8% of the value for 2020. Additionally, new CVC teams were stood up and others grew in teams and strength. Snowflake created their CVC. Carta has continued to grow and (standing up a fund) participate in the ecosystem. Bently Systems launched their CVC with Touchdown Ventures. Since Covid came, Bently Systems is not Touchdowns only new partner – they’ve launched multiple funds with others. Facebook and Amazon also launched (still are) their CVCs. I personally feel like this trend will only continue.

Q42020 NVCA Venture Monitor

In total, 2020 was a both up and down depending on which side of the table you sat. Startups faced a majority of the brunt. Unsurprisingly, investors faced less. Whether a standalone fund or CVC unit. The bankers also fared well given both the activity and volume in the M&A market grew. What we can all agree on is that one year into this pandemic, it is obvious that the venture and startup ecosystem are strong, and will only continue to grow thanks to the record amounts of dry powder, low interest rates, and ease to build companies + raise capital. It’s an exciting time to work in this industry.

*There are a lot of great, free resources on this subject. The NVCA publishes material, CB Insights as well. Additionally, fringe websites like Layoffs.FYI and others on recruiting trends.

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