What will happen to VC is a recession materializes in 2020?

March 30, 2020

What will happen to venture capital (VC) if a recession materializes in 2020? It’s a worthwhile question now given that a recession is from March to September 2020 is a possibility. In a fascinating look at the VC deal market during the 2008 to 2009 recession, private equity data provider Pitchbook provides a possible glimpse at 2020.

VC deal activity, a history lesson

First, a history lesson on VC deal activity from 2006 to 2020 year-to-date. In the boom years of 2006 and 2007, VC deal activity was $29 billion and $38 billion, respectively. The number of deals summed to 3,368 in 2006 and 4,353 in 2007.

Then, the recession hit. Deal value dropped slightly to $37 billion in 2008 and then again in 2009 to $28 billion. Interestingly, the number of deals rose from 4,353 in 2007 to 4,787 in 2008 and then dipped slightly in 2009 to 4,558.

Since 2009, deal value and the number of deals have exploded through 2019. The number of VC deals reached an all-time high of 11,844 in 2019 with a second-most all-time high of $136 billion in value (2018 has the all-time high in deal value at $141 billion).

Source: Pitchbook

Sector detail from 2007 to 2009

How did VC deal count and value change from 2007 to 2009 by area? Pitchbook provides that view below. Interestingly, deal count and deal value did not decline for Angel & Seed companies from 2007 to 2009. Overall, Angel & Seed companies saw deal count rise from 792 in 2007 to 1,246 in 2009 and deal value to grow from $0.9 billion in 2007 to $1.2 billion in 2009. Of course, over this same period, median deal size decline by a third, from $0.8 million in 2007 to $0.5 million in 2009.

In contrast to the generally positive picture for Angel & Seed VC activity, the early-stage and late stage VC activity ticked down appreciably over the period.

Early stage deal count went from 2,130 in 2007 to 1,860 in 2009, a decline of 18.8%, and deal value dropped from $14.7 billion to $9.6 billion, a drop of 35.1%.

Source: Pitchbook

Late stage also weakened. In 2007, late stage deal count was 1,431 and deal value was $22.4 billion. By 2009, late stage deal count had declined to 1,452 and deal value was down to $16.6 billion.

How might industry sectors be affected by the coronavirus?

Perhaps the most interesting table from Pitchbook’s report was the sectors with a significant exposure to the effect of the coronavirus. As shown below, Healthtech & wellness, Foodtech, Mobility tech, and IOT have significant exposure to coronavirus’ ravages. Of course, the other industries listed are also exposed to the potentially detrimental effects the coronavirus could have on business.

Source: Pitchbook

Conclusion

In looking at how a recession could potentially affect 2020 deal activity, the picture looks generally good. Although deal value dropped somewhat during the Great Recession, the number of deals increased from 2007 to 2009 as investors took advantage of lower deal value. If 2020 follows suit, companies looking for VC investment may have to take a haircut on company value, but there will be more than enough VC investors looking for good investment opportunities.

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