Before the COVID-19 pandemic shook up the world and reshaped the economy, Boston was quietly setting records.
According to new venture data compiled by TechCrunch, the region set what was at least a local maximum in venture capital raised in the space of a single quarter in Q1 2020.
But while Boston’s startup market announced a number of huge rounds that bolstered its total venture dollars raised in the first quarter, there were signs of weakness: Deal volume was its best since Q2 2019, according to a set of data compiled and released by PwC and CB Insights, but was still a little under the pace set in 2018.
So Boston’s startups raised lots of money, but couldn’t match prior highs when it came to the number of checks written. And those results were largely recorded before COVID-19 shuttered the city. Since then, we’ve seen a number of area startups lay off staff, something we explored last week.
Now, with fresh data in hand, we can take a closer look at the city’s first quarter of 2020. To better understand what we’re unpacking, we asked a number of local venture capitalists to weigh in. Let’s look back at Boston’s Q1 as we stride into Q2 with the help of Venture Lane, .406 Ventures, Volition Capital and Flybridge Capital Partners.
The data
Starting with a programming note is counter-flow, but bear with us. TechCrunch is starting a regular, monthly series on Boston and its startup market. This is a second prelude of sorts. Normally we’d hold news and interviews for a later date so that we’d have plenty of material for a column. In the face of relentless change, however, we didn’t want to hold off on reporting and synthesizing new information. When things are more normal, our pace will follow.
Per PwC and CB Insights, here’s the last few quarters of data, along with a few yearly totals to draw you the picture we can now see:
- Q1 2020 rounds, dollars: 123, $3.5 billion
- Q4 2019 rounds, dollars: 110, $2.1 billion
- Q3 2019 rounds, dollars: 106, $1.9 billion
- Q2 2019 rounds, dollars: 132, $2.4 billion
- Q1 2019 rounds, dollars: 141, $3.0 billion
- 2019 total rounds, dollars: 489, $9.4 billion
- 2018 total rounds, dollars: 498, $10.3 billion
It’s possible to read the numbers in a very positive light; Boston managed to effectively match its 2018 average deal velocity and best its 2019 average deal velocity, while setting a dollars invested pace that, when annualized, beats what the city managed in both 2018 and 2019. If you go back in time you can find better years for deal volume (2015 had 526 in Boston, per a prior PwC and CB Insights report), but Q1 2020 on an annualized basis ($14 billion) is better than any year Boston had on record.
In contrast, painting with a more negative brush, Boston’s Q1 2020 round count is the lowest single-quarter result since at least Q2 2018.
Our read is that Boston’s Q1 2020 venture market was strong, despite modest round count declines from year-ago results, but more important is a resurgence in deal volume and a huge dollar volume result. Investors were cutting more checks than in previous quarters, and they were larger on average.
While it’s notable that Boston was setting records before COVID-19, we wanted to ask Boston-area VCs and founders about how well set up, or not, their city’s venture scene is for the the future.
Christian Magel, Venture Lane
Christian Magel, the CEO and founder of startup co-working space Venture Lane, said that Boston startups have a “good financial buffer.”
He thinks Boston startups will have a “good financial buffer” from the Q1 spike, but the numbers are surely changing in the wake of the pandemic.
“As much as we have seen deals that were already in the VC pipeline being wrapped up quickly, we now see valuations coming slightly down and funding processes drawn out,” Magel said, adding that he thinks future capital raises will be impacted by factors other investors have noted: a lack of in-person meetings and “fund LPs who experienced a cash drain in the last weeks” and are feeling less peckish as a result.
Greg Dracon, .406 Ventures
Greg Dracon, a partner at .406 ventures, is staying optimistic about Boston’s tech scene because of two long-standing characteristics: a strong talent pool from universities and strong industry roots in healthcare, cybersecurity and robotics.
“COVID-19 aside, [the Q1 funding] is an indication of what’s happening here and I think we’re in early innings (no pun intended) of Boston establishing itself as the place to build companies solving hairy tech and healthcare problems,” he said. He noted that he’s seen entrepreneurs shift from building small to medium-sized successes and selling them to companies on the West Coast to staying local and going public on home turf.
Sean Cantwell, Volition Capital
Boston-based growth equity firm Volition Capital invests in companies that are largely bootstrapped until they reach scale. Volition recently raised a $400 million fund, its largest to date.
TechCrunch spoke with Sean Cantwell, a Volition Capital managing partner, about the area’s strengths and weaknesses in the new world. “Boston has a really good DNA and history of enterprise software technology,” he said, adding that Volition’s portfolio companies in the city “tend to fall into that category.” The fact that Boston has enterprise SaaS firms might help its startup scene survive in the short term thanks to the length of contracts they tend to secure.
But instead of thinking about Boston as a startup market with just two key categories of company (biotech and SaaS), Cantwell says the city’s upstart ventures are actually rather diverse. “Boston’s a big enough city that there are startup companies that fall into every category,” he said, making broad generalization difficult. But he was willing to add that companies in the area had less focus on a “grow at all costs” mentality, which could help startups endure this downturn.
But while Cantwell had some good tidings for Boston’s startup scene, he was as cautious as we were when it came to Q1 data. “You’re really not going to see the impact [of COVID-19 on the numbers] until Q2,” he said, adding that the same lag will apply to individual company performance.
“New business acquisition is gonna slow down,” the investor told TechCrunch, “ I don’t care who you are.”
Jeff Bussgang, Flybridge Capital Partners
Jeff Bussgang, an investor with Flybridge Capital Partners, put the next quarter curtly: “Q2 financing for Boston is going to fall off a cliff. The biotech industry may see some bright spots… but the financing market has frozen up as solid as the Charles River in February.”
The worst, it appears, is still ahead.
