Why Tech Startups Are
Still Thriving During the Pandemic?
During the last months, there were a few publications regarding the fund raising of startups during the 2nd quarter 2020, which was the first full-COVID quarter. According to KPMG Private Enterprise’s global Venture Pulse Q2’20 report, global venture capital investment showed continued resilience in the second quarter of 2020, reaching $62.9 billion across 4,502 deals – almost equaling total investment from the first quarter of the year and only slightly off the pace seen in 2019’s second quarter, which registered $69.8 billion invested.
On the US level, in the second quarter $29.8 billion was invested in North American startups (companies based in Canada and the United States), 18 percent less than the same period last year and 12 percent less than the previous quarter. Indeed, a decrease, but not the hit one would expect given the economic uncertainty and vulnerability of the market.
In Israel, there was even an increase! According to IVC Research Center, over the course of Q2/2020, Israeli high-tech companies raised $2.5 billion in 170 deals, up 33% in number of deals from Q2/2019.
So how come the investment in high-tech startups wasn’t affected as much as one would have expected by COVID19? How come in some cases it even increased vs. last year’s Q2? How is it that there are significant investments going on around the world during such a challenging economic era?
There are a few angles which can explain this phenomenon.
The Distribution Of The Capital Between Early Stage And Late Stage Companies
When looking at the overall numbers, we sometimes don’t look at the division of the pie that we’re looking at. For example, there may be a few very large deals, of nine or even ten figures, that will create a bias to the full picture. Thus, large growing companies that have already high valuations continue to attract investors – as sometimes they are perceived as a lower risk investment vs. early stage companies. According to KPMG Private Enterprise’s global Venture Pulse Q2’20 report, the median series B deal size on the global scale has increased from $17m in 2019 to $19.6m in 2020, and on series C, from $29.3m to $35.7 in 2020. For first-time rounds, it is much more challenging: in H1 2020, the number of deals and the volume has decreased dramatically vs. 2019 numbers – so, for early stage companies, these times are more challenging as investors are seeking to mitigate their risks, and they do it by investing in more mature companies.
Investments In Existing Portfolio Companies Rather Than In New Companies
Many VC investors spent Q2’20 focusing on the companies within their own portfolios.
Many of them have realized the challenges the startup companies in their portfolio are facing, and thus decided to focus on these companies and inject capital to assist them with handling the new reality. These VC’s want to make sure they have the ability to support the existing portfolio before investing in new companies.
So once again, even though the overall number looks good, for new companies or for companies that need new external investors, these are indeed more challenging times.
According to KPMG Private Enterprise’s global Venture Pulse Q2’20 report, the average valuation of most rounds has increased (mostly the late stage ones), but there are still many companies that have dropped their valuations and thus created attractive prices comparing to the pre-COVID era. Many early stage companies realized that in order to fundraise during these times, they will need to decrease their pre-COVID valuation. This is perceived by many investors as a great opportunity to make investments in promising companies at very attractive valuations.
New Funds Have Capital To Invest
Most of the new funds that have launched in the last two years, usually have a five-year period to invest, and so they cannot afford to sit on the fence and hold their capital. Since they are relatively young funds, they don’t yet have a large portfolio to support, and are constantly looking for new opportunities to invest in. It is a great time for buyers as there are many opportunities in the market.
Investing In ‘Hot’ Verticals
There are a few verticals that became ‘hot’ during COVID such as education technologies, logistics & deliveries, biotech and telemedicine. These verticals are attracting investments as it has become evident that not only are they growing quite significantly in the last months, they are here to stay and most likely will grow further in the near future. A few examples: food-delivery company Deliveroo raised Europe’s largest deal of the quarter of $575 million, Arville Therapeutics raised $222 million, iTeos Therapeutics raised $207.8 million, biotech company AbCellera raised $105 million, and a $71 million raise by EdTech Apply-Board.
So, like any headline that quotes numbers, it is usually advised to look deeper into the numbers and better understand some further analytics that may give different angles and perspectives to the larger picture. Even though it may look as if the tech segment is immune to COVID – it is not really. Yes, the overall numbers look good, and this by no means should be taken for granted, but there is definitely a new reality that affects technology startups directly: on their funding needs, their revenue projections, their cash sensitivity, their long-term plans and their go-to-market strategies. Anyone who is working or investing in high-tech, should be highly sensitive to the daily-changing reality we are living in, and take that into account when making the planning for their ventures, and when investing in new opportunities.
Uri Adoni is author of the new book, The Unstoppable Startup: Mastering Israel’s Secret Rules of Chutzpah and has over 20 years of experience in the high-tech space.