Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
After spending perhaps more time than we should have recently trying to figure out what’s going on with the public markets, let’s return to the private markets this morning, focusing in on venture capital itself. New data out today details how U.S.-based VCs fared in Q1 2020, giving us a window into how flush the financial class of startup land was heading into the COVID-19 era.
The short answer is that big funds raised lots of cash, while smaller funds appear to have put in a somewhat lackluster quarter.
That big funds performed well in Q1 shouldn’t surprise. We’ve seen NEA stack $3.6 billion in March and Founders Fund raised $3 billion for its own investing work earlier in the quarter, to pick two examples TechCrunch covered.
The impact of these mega-raises, according to a report from Prequin and First Republic Bank, was to push up the total amount of capital raised by American venture capital firms in the quarter, while the decline in the number of funds that raised $50 million or less led to a slim number of total funds raised. It’s hard to call a surge in dry powder bearish, but the fall-off on smaller funds could limit seed capital in the future.
Notably, there have been warning signs since at least 2019 that seed volume was slowing; recent data from the U.S. underscores the trend. So what we’re seeing this morning in data-form is a summation of what we’ve previously reported in a more piecemeal fashion.
Let’s pick over the data to see what we can learn about how much spare capital the venture classes are sitting on today.
The rich get richer
The whole report is worth reading if you have time. Aside from the data concerning how much money VCs are raising themselves, it includes several interesting bits of information. For example, there were just 960 venture deals closed in the U.S. in Q1 — a pace that would make 2020 the slowest year since 2009 if it held steady.
Per the listed data, 83 U.S.-based venture capitalists closed (“held a final close”) a fund in Q1 2020. This was off about 24% from the Q1 2019 result of 109. However, while the number of funds raised was lackluster, they made up for it in dollar-scale. According to Preqin and First Republic Bank, the “funds that closed raised $27 [billion], a substantial total representing over half of the capital raised in 2019 ($50 [billion]).”
Looking at historical results, the 83 funds raised in Q1 2020 would put the U.S. venture scene on its slowest fund-raising pace since 2015, provided that the first-quarter cadence was maintained throughout the year.
As noted before, this was led by funds of $1 billion or more. In Q1 2020, seven such funds closed, one more (or 16.6% more) than in all of 2019. This could easily be a timing quirk, nothing more than coincidence. Or, savvy investors saw that a recession was an eventuality and got one more fund raised before the market turned.
Going down the venture capital scale, funds of $100 million or less raised just $1.1 billion in total in the first quarter in 47 funds. That works out to 57% of Q1 VC funds raising around 4% of US venture capitalist’s Q1 haul. If that feels modest (VC fund’s share of capital raised follow a similar power law to the returns they seek; a handful account for most of the money), it gets even more extreme.
Going down another rung to funds $50 million and smaller from the $100 million and smaller cohort, the fund sizing saw 42% of Q1 funds closed, or about 35 funds. It’s a somewhat poor showing in numerical terms, with the report calling the figure “the lowest quarterly level in 10 years.”
Startup takeaways
The smaller number of nine- and eight-figure funds could indicate that seed and early-stage capital will be scarce compared to late-stage dollars, fueled by three-comma funds. But what isn’t clear — yet, at least — is the differing propensity of the different venture capital funds, by size, to invest.
Will large funds hold onto their capital until the market becomes a bit more stable? Say, until the rate at which the U.S. sheds jobs falls to one million per week? At the same time, the comparatively impoverished $50 and $100 million funds that are content with waiting five years or more for a return may be willing to invest at a faster clip than late-stage funds that can’t see an exit window in the near-term.
Q2 is the least-certain quarter in tech, startups and venture capital that I’ve ever covered. What happens next is unwritten because we haven’t seen this sort of contraction before. So we’ll keep looking until we understand it. More Monday!
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