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Investors accelerating during the pandemic

Not all VC investors are being slowed down by the pandemic

As the venture capital industry pumped the brakes on dealmaking, a handful of investors are taking a different tack.

Among the top 20 most active US VC firms with assets under management of $500 million or more, just five have recorded more deals in the first half of this year than in the same period last year, according to PitchBook data.

Some of the venture world's biggest names⁠—including NEAandKleiner Perkins⁠—have done half as many deals as they did last year. Industry-wide, the quarterly pace of dealmaking has dropped to its lowest level since 2012, PitchBook data shows.

US VC firms have scaled back pace of investing

But some firms sense there's a small window of opportunity in the coronavirus era, as companies experiencing a tailwind look to capture more market share.

"We've just seen a handful of our sectors really spike, and I think that's all contributed to deploying more capital in this period," said Ian Sigalow, co-founder and partner atGreycroft.

The firm has been tied to 30 deals so far this year, compared with 26 in the first half of 2019, according to PitchBook data.

Investors with narrow industry focuses have either been helped or hurt by the rapid change of fortunes caused by the coronavirus.

Greycroft recently invested in grocery delivery startupMercatoand digital pharmacyMedly, Sigalow said. Both companies have seen business grow during the pandemic. The firm made several similar investments after running an analysis to identify portfolio companies that were outperforming expectations.

Economic downturns have a way of shining a light on businesses that are particularly resilient, said Lonne Jaffe, managing director atInsight Partners.

But taking advantage of the opportunities presented by macroeconomic forces requires swift action.

"Sometimes those demand spikes only last for a short period of time, and if you don't grab them while they're there, they're gone," Jaffe said.

Insight's pace of dealmaking also rose, and some of its recent investments have seen a coronavirus tailwind. Those includeGranulate, which helps companies reduce spending on cloud computing, telehealth companyTyto Careand grocery startupImperfect Foods.

Even if they do not directly benefit from changes to consumer behavior, later-stage startups can gain a leg up over smaller disruptors and established incumbents during a downturn, Jaffe said.

"A growth stage business can emerge in an environment like this after 18 to 24 months in a stronger market position," he said.

While some investors may be more active, that doesn't necessarily mean they're deploying more capital, said Patrick Pohlen, a partner at law firmLatham & Watkins.

The median deal size for late-stage US startups, which capture the majority of VC dollars, has dropped more than 10% as of June 17. However, the crisis has not led to widespread bargain buying, as the percentage of down rounds this year is comparable to 2019, according to PitchBook data.

Part of the drop in activity comes from the demand side, as some startups put off fundraising.

"Companies in downturns get much more creative around how to extend capital. They make more with less," Pohlen said.

In the first half of 2020, US venture firms with more than $500 million of assets under management emphasized follow-on investments over new investments compared with last year, according to PitchBook data. That shift is partly intentional, as firms took action to make sure that promising portfolio companies had enough cash on hand to ride out the economic uncertainty.

But as the regular drumbeat of industry events has ground to a halt, firms must get creative to source new investments.

Insight has increased its marketing presence by hosting webinars and producing content aimed at helping companies through the pandemic.

For Greycroft, longer working hours has also helped it keep up the pace.

"People aren't taking vacation right now because there's no place to really go on vacation. I think everybody needs one," Sigalow said.

Source pitchbook


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