In 2020 VC Investing hit a record $156.2 billion into U.S. startups amid the coronavirus pandemic, marking the first time venture capital investments topped $150 billion, according to a report from REO Capital.
That data was among the findings in “PitchBook-NVCA Venture Monitor,” a quarterly report produced by financial database PitchBook and the National Venture Capital Association. The report found that even with all of its challenges, 2020 was a record year for exit and fundraising activity.
Ropes & Gray LLP partner Bradford Flint, who co-leads the firm’s venture investing and emerging company practice, told REO Capital in an interview Thursday that while there was definitely a downturn in venture capital activity at the beginning of the pandemic, activity began accelerating as early as the third quarter of 2020.
“Once folks got more comfortable with the fact that there was a light at the end of that tunnel and the pandemic wasn’t massively negatively affecting any of these industries that you typically deal with with VC investments, activity started picking up at that point,” Flint said. “Folks were feeling quite good by the time we got to the fourth quarter, and at that point, our activity levels were higher than the same quarter of the prior year.”
In terms of investing activity, the $38.8 billion invested in U.S. startups in 2020’s fourth quarter brought the total investments for the year to $156.2 billion, which beat out 2019’s $138.1 billion tally by a long shot. Pitchbook and NVCA said deal activity in the fourth quarter was fanned by investors, especially those investing in early-stage companies, adjusting to the market conditions created by the pandemic.
There was also a record amount of deals worth $100 million and up, with 321 of these transactions wrapping up in 2020 to amass a total $70.9 billion, the report shows. That figure exceeds the record set by 2018’s total $64.6 billion worth of mega deals.
The report noted that biotechnology, biopharmaceutical and technology businesses performed particularly well in their fundraises.
Flint said his practice echoed that trend, with a spotlight on those sectors as many VC-backed companies took key roles in addressing the pandemic.
“We were looking at small companies who had developed what are now being rolled out as the vaccines here,” Flint said. “Moderna, although a public company, was not so long ago a VC-backed startup and BioNTech in Germany was a young company that partnered with Pfizer.”
In terms of technology enterprises, Flint pointed to connectivity platforms like Zoom and Slack, which he said rose “to a new level of importance and centrality to all of our business lives.”
Not only did investors and firms give record amounts of money, but the report says venture capital firms raised a record $73.6 billion themselves last year, an increase from 2018’s record $68.1 billion. But although investment vehicles raised more money, that capital was placed into just 321 funds — fewer than in previous years.
Well-established fund managers — those that have raised four or more funds — monopolized fund investments, raking in more than 70% of the total capital for the first time since 2014. The number of mega-funds with $500 million and more of commitments also reached an all-time high, with VC firms sealing 44 of the vehicles in 2020, compared to just 24 in 2019. Among the largest were Andreessen Horowitz’s $3.2 billion LSV Fund II and $1.3 billion flagship Fund VII.
On the flip side, there were just 50 first-time funds closed in 2020, which was a seven-year low. Whereas PitchBook said first-time funds raised $6 billion and $10.8 billion in 2018 and 2019, respectively, they landed just $3.9 billion in 2020.
“Although confidence has certainly returned, given the pandemic in the background, perhaps there’s a little bit more of a focus on using investment professionals with track records that are tried-and-true and well known in the industry,” Flint said of the preference for well-established fund managers.
He also noted that more capital was raised in 2020 because investors may have increasingly turned to venture capital and private equity investments to avoid injecting capital into what they may have seen as an “overvalued public market.”
Michael Chow, the director of research at NVCA, told Law360 in an interview Thursday that the trend of investors sticking to established networks could have a worrying effect on both new fund managers and first-time founders.
“In an environment with uncertainty, with investors going to known quantities and seeking the safe haven of established firms and established founders, then you worry that emerging managers and first-time founders aren’t going to get a chance,” Chow said.
“If you look four or five years out, if you have a severe drop in seed-stage activity, then you’re not going to have sufficiently mature companies in three, four or five years to do those price rounds, which are very important for a lot of firms who don’t invest in the seed stage and only do price rounds,” he added.
On a positive note, the value of investment exits in 2020’s fourth quarter set the stage for 2020 to hit another milestone. With exits in the last part of the year booking a total $138.2 billion value, the value of all of the year’s exits peaked at $290.1 billion, according to the report.
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