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In January and February, many of my colleagues managed to sum up the results of the 2019 venture year and to make their assumptions about the prospects of the market in 2020. I missed the moment, but as it turned out — for good, as taking into consideration the recent events those forecasts are to be corrected.
We talk to startups and investors, you get the value.
I’m suggesting you an interesting format — we will analyze the key trends of the venture market over the recent years, I will try to make my own conclusions about the possible influence of the economic recession on the market, and then I will be glad if you join the discussion of these conclusions here in comments, as I don’t pretend to be 100% right in the correctness of the assumptions you will read below.
In the USA the number of mega-rounds ($100M and more) by October 2019 already exceeded the number of mega-deals in 2018. They accounted for more than 43% of all money invested in the American venture.(3Q 2019 PITCHBOOK-NVCA VENTURE MONITOR).
In Europe, the deals worth €25M and more accounted for 59.4% of the total deals volume (PITCHBOOK 2019 ANNUAL EUROPEAN VENTURE REPORT). Also a record number of mega-rounds occurred in Europe, including deals with Klarna, Flix Mobility, Get Your Guide, Deliveroo, UiPath, and N26. The biggest European round was Softbank’s March investment in OneWeb — $1.25 B.
In Israel, more than 50% of venture capital money was invested in rounds of more than $50M (“Israel doubles number of unicorns in 2019”, Globes). The three biggest deals of the decade were made in 2019 — the $300 million round of Lemonade, the $250 million round of Next Insurance, and the $200 million round of Cybereason.
The mathematics of such large investments can usually be explained by the general investors’ expectations of the positive market dynamics. Since, obviously, due to the latest events in the world and the reaction of stock markets to them, most of them are now adjusting these expectations, so, such a crazy number of mega-rounds is rather not to be expected in 2020.
Also, in recent years, one could often hear opinions that the market is at its peak, and it’s high time to prepare for the worse. This resulted in the propensity of many funds to invest in financially sustainable projects. And the example of Zoom — which went to the IPO generating profits and became almost the only big technology company in 2019 (among the ones which went to the IPO), whose shares showed steady growth — showed that you do not always need to choose one thing between a stable business model and rapid growth.
With the recession taking place, it is obvious that the trend to increase the requirements of investors for projects will only increase.
The number of deals of early-stage startups fell steadily. In the USA in Q3 2019 the lowest number of such deals was made over the last 7 years (“Venture capital investments in U.S. set for another bonanza year”, Reuters).
In Europe, the number of rounds of more than €10M fell down as well (PITCHBOOK 2019 ANNUAL EUROPEAN VENTURE REPORT).
In Israel, the volume of seed deals decreased: from $169M in 2018 to $148M in 2019. The number of first investment rounds for a company has been declining for several years in a row.
This is quite worrisome, because most agree that the health of the ecosystem should be measured by the number of deals at the early stages, and not by the amount of investments.
There are 2 reasons explaining the fall down of the number of early-stage deals:
Fewer startups are being created. For example, the peak in the US was observed in 2015, since then the number of new startups created annually has fallen by 2 times by 2019 (“State of the Venture Capital Industry in 2019”, Toptal).
Now these startups can start showing traction much faster and cheaper, that’s why more and more early-stage startups choose to bootstrap (developing a startup for the founders funds so that to reach the break-even point as soon as possible) and skip the early investing rounds.
So what will happen with seed investments? With the 2 trends mentioned above and the fact that investors increase their requirements for startups, one can forecast the fall in the number of seed deals as well.
It happened so in the last few years, that startups faced the money not only from the traditional venture funds but also from many investors, for whom venture capital was not a priority investment area.
Corporate VC funds (or CVC) were the most active ones amongst alternative investors. In Europe, the volume of money that corporations invested in startups grew from €1.5B in 2009 to €14.7B in 2019. Nearly 700 corporates took part at least in one investment round in 2019, the volume of their investments accounted for 20% of the whole market (“The State of European Tech”, Atomico).
At the same time, in Israel, the share of deals with at least one corporate investor grew from less than 25% in 2012 to 43% in 2019 (“Corporate Funds Are Taking Over Israel’s Startup Scene”, CTech).
Family funds and non-typical institutional investors also were more active in recent years. Traditional venture funds noticed that beginners due to lack of experience, often made very unconventional, and sometimes inadequate deals: with overestimated valuation, untypical deal conditions — or simply funded frankly weak projects.
During the recession managing partners will most probably focus on the core activities, cutting down the volume of investments in ‘experimental’ projects. And since VC for non-specialist investors is an experiment, there will be a significant drop in the share of non-traditional investors in the venture capital market.
Since there was more and more capital at the later stages, startups could afford to stay private for longer — for example, the average revenue of companies at the time of IPO increased by almost 2 times over the past decade (State of the Markets: First Quarter 2019 by Silicon Valley Bank).
Before 2015, in the US, an average technology company that was publicly listed (IPO), raised about $100M of funding before it and raised about the same amount of investments at IPO. Now, 90% of American unicorns (of which there are already several hundreds) attract more than $100M in a single round.
In this regard, the exit values grew up correspondingly. An average exit in the US has been growing year after year since 2015. In 2019, an average exit size in Israel was $124M what is 51% more than a year earlier.
Most probably corporates, institutional investors and public markets will react to the recession very sensitively, will keep quiet for a while, so 2020 will be a quiet year for exits despite the fact that tens (if not hundreds) of companies attracted pre-IPO or M&A rounds in the recent years.
Today the venture industry is diversified as never before. For example, in the US one can find projects from logistics, aerospace, b2b software, biotech, medtech, consumer products and other verticals among the top deals of 2019. There is no single dominant industry right now.
And it’s very good for the long-term stability of the market. That’s why I can make and an assumption that the correction of the venture market will not go as fatal as in the times of the dotcom bubble.
So, the bottom line is:
The market will fall: the number of mega-rounds, as well as the number of early-stage deals, will fall down;
Investors’ requirements will keep increasing;
Non-specialist investors (corporates, family funds, and institutional investors) will cut down their investments in startups;
2020 will be a quiet year for exits;
But despite all the factors described above, the venture market will not be fatally deflated, since, unlike during the dotcom bubble, it is quite diversified now.
Let me repeat one more time, I’m not pretending to be absolutely right in my conclusions and consider this article rather as a nice motive to start a discussion, I invite you to discuss this matter in the comments.
Venture to all!
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