Despite facing macro headwinds from the COVID-19 pandemic for most of 2020, the US VC industry remained resilient on a broad level. Overall, 2020 posted record investment into high-growth startups, record capital raised by VC funds, and the second-highest year for VC-backed exit value. However, underneath the surface of those topline stats exists an increasingly concentrated industry with divergent outcomes for established players and newcomers.
Although late-stage deal count and value dipped in Q4, both metrics reached record annual highs, and late-stage companies accounted for 28.8% of total VC deal count and 66.7% of value in 2020. Their increased share of activity may have stemmed partly from investors turning much of their attention to supporting existing portfolio companies with capital infusions to maintain operations and accelerate growth. At the same time, mega-deals (largely buoyed by large, late-stage companies) also reached annual record highs for deal count and value, helping to drive up the median deal size across all investment stages.
On the other end of the investment cycle, seed-stage and first-time financing activity fell sharply, proving a more challenging fundraising environment for newer entrepreneurs. Female founders and entrepreneurs in the middle of the country, who have traditionally been underrepresented in VC funding, also felt the impact of investors largely allocating capital to existing portfolio companies or known relationships. Emerging VC fund managers have had a difficult time raising capital as well, with LPs seemingly unwilling to take risks on unproven investors and shying away from new relationships. Established firms secured nearly 75% of the total capital raised for venture funds in 2020, marking the highest share this cohort has held since 2012.
A big concern at the onset of the pandemic was the impact it would have on the exit environment for VC-backed companies, but highprofile exits in Q4 elevated 2020 to a banner year for liquidity. December saw the two largest VC-backed IPOs of the year—Airbnb and DoorDash—and the largest VC-backed acquisition with Intuit’s $7.1 billion purchase of Credit Karma.
VC-backed companies fared relatively well post-exit in 2020, and financial markets seem to have accurately priced in the election outcome, with public markets hitting record levels after all the votes were counted. That markets remained strong heading into yearend bodes well for IPOs in 2021. Industry attention will also remain on special purpose acquisition companies (SPACs), which abound and have rapidly evolved over the past six months, becoming more flexible on terms due to competition. If SPACs are here to stay and deal terms remain favorable, then companies may be graced with another alternative to traditional IPOs, avoiding outsized “pops” that transfer wealth the wrong way.
At a sector level, biotech & pharma benefited from the race for a COVID-19 vaccine, rapid shifts from in-person treatments to telehealth, and other changes in medicine and healthcare prompted by the pandemic. Companies in the sector raised a record amount of capital in 2020, and the bull investment run is likely to continue in 2021. The tailwinds for biotech & pharma due to renewed interest in vaccines and antivirals may last for years. Other silver linings for sector trends include the acceleration of consumer adoption of e-commerce and delivery and the shift to a distributed workforce model. Many of these trends could persist even in a post-pandemic world.
On the heels of several years of high fundraising levels, the venture industry will start 2021 with $152 billion in dry powder. While uncertainty remains in the new year, the vast sum puts the industry in a strong position to deploy healthy levels of capital into promising startups.
