Recently, private equity data provider Pitchbook released their Q2 2020 state of the venture capital (VC) / private equity (PE) markets. The report provides an interesting glimpse into the state of PE and VC leading up to and over the course of the coronavirus pandemic.

Spoiler alert: The PE and VC universe is not as bad as some might think – people still need financing and business still happens during a pandemic.

Deal Value Still Strong

Heading into the shutdown, one might have expected deal value to suffer as in-person interaction takes a backseat to concerns about the potential health effects of the coronavirus.

Interestingly, deal value continued strong through the first half of 2020. As of June 30, 2018, total deal value reached $69.1 billion, slightly above things stood in the prior year (the chart for the prior year’s shows the figures for the full year). Deal count hasn’t kept up as well, but still healthy at 5,058. For the full 2019 year, the total number of deals reached 12,211.

Source: Pitchbook

The effect of the coronavirus shows up more clearly in the quarterly figures, where deal count took at dip in the second quarter of 2020. Perhaps unsurprisingly, Angel & Seed investments experienced the largest drop in deal count, followed by Early VC and Late VC.

Source: Pitchbook

Mega-deals Ask: What Coronavirus?

Perhaps one of the more interesting findings from Pitchbook’s update is the mega-deal picture. Mega-deals continued to flourish in the first half of 2020, reaching $32 billion in value across 131 deals as of June 30, 2020. For the entire 2019, the number of deals reached 234 and capturing $54.4 billion in value. Low interest rates are undoubtedly a boon to profitable PE and VC investment.

Source: Pitchbook

Initial Investments Cool Off

One place where the effects of the coronavirus clearly had a cooling effect was with initial investments. Total deal value for initial investments dropped to $4.6 billion across 1,194 deals. For the entire 2019 year, the total amount of deals reached $13.7 billion across 3,228 deals. It seems highly unlikely that 2020 will reach this high of level.

Source: Pitchbook

A Couple of Other Views of the State of PE/VC

Two other interesting views on the state of PE/VC are captured in the following two graphics. The first is the median size of deals. In a completely surprising result, and speaking broadly, median deal size has held up fine, with the median deal size for angel investments at $0.6 million, and median deal sizes for the other investment classes at $2.2 million (seed), $6.0 million (early VC), and $8.8 million (late VC).

The view is even more interesting when looking at the time companies are staying private. According to Pitchbook, companies continue to stay private longer. For angel deals, the median years since founding is 3.4 years, the highest on record. For the other deal types, the private staying power is also transparent.

Source: Pitchbook
Source: Pitchbook

Conclusion

Overall, the PE and VC world seems to have experienced only a slight hiccup due to the coronavirus and the picture looks bright for the coming months ahead.

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Private equity data provider Pitchbook is out with a fascinating look at their 2020 predictions versus reality so far. The predictions made by Pitchbook were likely not much different that most private equity forecasters. As such, here’s a look at expectations versus reality.

Forecast #1: The median pre-money valuation for seed-stage companies will eclipse $8.5 million

For the past decade, median pre-money valuations have consistently risen. Even though it is possible for pre-money valuations to continue to rise in 2020, perhaps reaching a decade or all-time high, the odds are not in early stage companies’ favor.

As of writing, the median pre-money valuation for seed-stage companies reached $7.5 million, down 11.8% from Pitchbook’s prediction. In 2019, pre-money valuations reached $7.7 million.

In addition to the general economy, another force that may prevent pre-money valuations from reaching $8.5 million may be that many seed investors may move upstream – seeking later stage investments – that stay with the riskier investments in 2020.

Source: Pitchbook
Source: Pitchbook

Forecast #2: 2020 will mark a new annual record for U.S. megadeals

Leading up to 2020, U.S. megadeals were on a tear. Megadeals reached 238 in 2019, well above values seen over the past decade. Prior to 2019, the highest number of megadeals was in 2018 at 209. The dollar value of megadeals had also exploded, reaching $55 billion in 2019, just off from the all-time high of $63.3 billion in 2018.

Given this background, it likely comes as no surprise that Pitchbook expected further expansion in mega-deal activity in 2020. Alas, that was not to be the case. Through June 18, 2020, the number of deals is only 119 and dollar deal volume has only reached $28.9 billion. Unless the latter half of this year has a explosion that likes of which the world has never seen, mega-deal activity will likely decline in 2020 relative to 2019.

Forecast #3: The median U.S. VC fund size will top $110 million, reaching a decade high

Interestingly, although the median U.S. VC fund size plateaued in 2019, Pitchbook still expected to see significant increase in fund size in 2020. The reality so far in 2020 has been less than what was expected. The median U.S. VC fund size through June 18, 2020 reached $100.5 million, only $9.5 million short of the $110 million target. Given this, it is unlikely that the median U.S. VC fund size will reach $110 million in 2020. A positive caveat to this downer is that VC fundraising is still growing quickly. If the trend through the first half of 2020 holds for the second half, 2020 may beat the record year seen in 2018 of $65.4 billion.

Source: Pitchbook

Summing Up

Overall, to say that 2020 has been a massive disappointment is an understatement. By most measures, the private equity industry’s lofty expectations are unlikely to reach, as are most forecasters’ expectations. May the latter half of this year prove to be a lovely surprise.

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How has the private equity/venture capital world held up during the pandemic? Private equity data provider Pitchbook is out with a brief view on the numbers. Overall, the picture is not as bad as some might have expected.

Venture Capital Investment

According to Pitchbook, venture capital (VC) investment is down in 2020 compared to 2019. Overall, investors put $63.2 billion into VC-backed deals, down from last year’s high $72.2 billion.

One has to remember that 2019 was a watermark year, and as such, one would have expected the market to let off some steam even if the pandemic had not happened. When comparing VC activity in 2020 to other years outside of 2019, VC-backed investing is still doing quite well.

Source: Pitchbook

Deal Flow

Shifting to deal flow, the picture is less positive. In 2019 at this point, there were 6,357 deals. In 2020, that figure dropped to 4,675. Unsurprisingly, deal flow slowed more sharply because of the mandatory stay-at-home orders, mask wearing, and other social distancing measures. The question remains to be answered is whether the pent-up investment demand shows up in the third quarter of 2020.

Source: Pitchbook

Mega-Rounds

A very positive bright spot in the VC/PE picture through 2020 is mega-rounds, which are deals with valuations of $100 million or more. Interestingly, through June, there’s been approximately $29 billion worth of mega-deals. If this trend continues, 2020 will actually surpass 2019 in mega-deal volume. The 2019 mega-round volume of $55 billion was the second most on record, suggesting that 2020 could potentially be the second (or even the highest) mega-round volume ever.

Source: Pitchbook

Seed Capital

One down spot on the generally positive VC/PE investing view is seed capital. Seed capital deals dropped 45% in the first half of 2020 compared to 2019, from 1,447 to 803. Additionally, invested capital dropped from a healthy $3.3 billion in 2019 to $2.2 billion in 2020. As one would expect, when times get less certain, investors pull money away from the riskiest of bets, and that’s exactly what has happened so far with seed capital.

Source: Pitchbook
Source: Pitchbook

Summing Up

Overall, according to Pitchbook, the private equity/venture capital world is holding up fairly well during the pandemic. Investment sourcing, demand, and funding is still there for the innovative movers in society.

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