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COVID-19 fails to stop the march of the unicorns

Q2 2020 venture capital totals for the US are down but not out


Image Credits: Nigel Sussman (opens in a new window)

We’re digging into Q2 2020 venture capital results this week.

Today we are exploring U.S.-specific results after taking a broader perspective yesterday. As with every quarter, our goal is to understand how strong, or not, the domestic and global VC markets are so that we can better follow the pace of startup dealmaking.

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TechCrunch will explore specific metros in the coming days, but today we’re sticking to numbers that detail the whole United States’s second-quarter venture outcome.

The results may surprise you. Despite the COVID-19 pandemic and huge disruptions to how companies large and small work, VCs put lots of capital to work in American startups during Q2. While total dollars put to work were down compared to Q1 2020 and the year-ago period, the declines were modest. Unicorns appeared to have a moderately good quarter to boot.

This morning we’re leaning on fresh data from the MoneyTree Report, compiled by business data company CB Insights and its partner, PwC.

Our goal is not to perish under a crushing tower of numbers, but to snag only the most important trends and squeeze them for all they can tell us. Let’s go!

Better than expected

To avoid bogging you down in infinite data points, we’ve broken our read of the report into themes: Q2 U.S. VC deal volume, dollar volume, the first half of the year in historical context, unicorn metrics and how many $100 million financings were recorded during the period, deals that we could call unicorn food if we wanted to be poorly written.

Deal volume recovered some after consistent declines

After peaking in Q2 2019 with 1,672 transactions recorded, U.S. venture capital deal volume fell consistently on a quarterly basis until it reached a nadir in Q1 2020 with 1,336 deals. In Q2, the pattern reversed, with deal volume rising to 1,374 deals.

The sequential-quarterly growth was modest (2.8%) but seeing this key indicator go up instead of down means that a worrying trend has been broken, a good thing for startups that need capital as COVID-19 continues to make running a company harder for many.

What drove the improvement? Seed deals, per the MoneyTree document, which rose to 324 in Q2 2020 off of a low set in Q1 2020 that was at least the worst period since 2015. The youngest companies, then, had a better quarter than we might have expected. Other categories did not fare as well, with CB Insights and PwC tabulating declines for Series A, B, C and D companies. It appears that Series E rounds were effectively flat.

Naturally seeing such uniform declines in series rounds is not bullish. And with seed deals propping up deal volume, we’d expect total dollars invested to fall. They did.

Dollar volume declined less than expected

Given the declines in Series A through D deal volume, you’d be in good stead to presume that dollar volume fell sharply in Q2. It did not, mostly due to a somewhat strong quarter for nine-figure deals that we’ll get to in a minute.

Dollar volume data is notably consistent: In Q2 2020 U.S. startups raised $26.9 billion according to the two firms behind the report. That figure was down $100 million or so from a Q1 2020 result of $27 billion, and $3.9 billion from a year-ago tally of $30.8 billion. The year-over-year decline works out to about 12.7%, which is material but not terminal.

While deal and dollar volume were both down in the quarter, how those results shook out in terms of media deal size for the various stages of startup investment varied. From Q1 2020 to Q2 2020, for example, seed, Series A and Series E deals grew, while Series B, C and D were flat to down. Series D rounds appeared to record the sharpest declines in median size in Q2 compared to the first quarter of the year.

So, middle-aged startups had a harder time of it than the youngest and the oldest of their peers in the quarter, at least according to the midpoint of their capital raises.

H1 2020 in historical context

The first half of this year (H1 2020) has seen fewer deals and dollars invested than in the same period of 2019. According to CB Insights and PwC calculations, the $53.9 billion that U.S.-based startups have raised so far in 2020 works out to a 7% decline compared to 2019 at this point. Still the H1 2020 tally appears to be stronger than the results set in 2018 and before, again only looking at the first half of each year.

The 2019-to-2020 declines are likely noticeable to startups raising capital, but I suspect that if you had told the startup world during the March doldrums that domestic dollar volume would be off by only a single-digit percentage point at midyear, it would have been cause for celebration.

Deal volume is down a bit more sharply from the pace set in 2019 and 2018.

We’ll have a better picture of where 2020 will wind up in a comparative sense at the end of Q3, but today we can forecast with modest confidence that some declines are likely, but steep reductions in deal volume and VC dollars invested in U.S. startups appear unlikely.

Unicorn creation slows as the herd grows

After peaking in Q4 2018 with 23 startups reaching unicorn status (a $1 billion private valuation), and a second peak in Q2 2019 giving the world 20 more such companies, unicorn births have slowed down. Indeed, from Q2 2019 to Q2 2020, the number of new domestic unicorns created has slowed in each successive quarter, from 20 in the year-ago quarter to just 11 in Q2 2020 according to the report.

But, given the historically modest pace at which unicorns exit, either through an IPO or an M&A deal, the total unicorn population rose from 204 in Q1 2020 to 209 in Q2 2020. This goes to show that not even COVID-19 could stop the ever-rising number of incredibly highly valued startups that private investors are willing to fund at prices that were formerly reserved for public companies.

While the number of unicorns has continued to grow, the aggregate valuation of all U.S. unicorns has stayed flat. This implies that some super-late-stage unicorns have exited over time (correct) as newer, younger unicorns fill the pipeline for eventual exits (correct). What dynamic this younger, less-valuable unicorn cohort will present if the IPO window stays open is not clear, but we could see younger, less-mature unicorns test the exit market.

$100M+ financing reached record highs

Finally, new unicorn creation kept up due in part to the number of $100 million and larger rounds that the report details.

In Q2 2020, the MoneyTree document details a total of 69 rounds of $100 million or more, a historical record according to its accounting.

However, while the number of rounds worth nine figures or more reached a record high, the total dollars that those deals represented did not. Not even close, it turns out, with Q2 2020 seeing $12.1 billion in dollar volume for nine-figure investments, far under the historical record set in Q4 2018 when the tally reached $25.6 billion.

In more recent times, the Q2 2019 result was $13.9 billion and the Q1 2020 result a still-better $12.4 billion.

Summing: There is some weakness in the Q2 U.S. VC data, with dollars invested falling, new unicorn creation slowing and fewer dollars flowing through the biggest deals. But at the same time, deal volume recovered, the total number of domestic unicorns reached a record and there were the most deals worth $100 million or more recorded in a single quarter ever — during COVID-19.

So, yes, some data points could have been better, but who thought things were going to be this good a few months ago?

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