Key takeaways:
- Exit activity saw a major uptick nationally, recording the second highest exit values on record in Q3.
- Local exit flow was the second lowest going back to 2014, but experts say there's little reason for concern
- L.A. saw fewer deals in Q3 than anytime since 2016, but also the highest amount of capital invested since that year, showing a preference for quality over quantity
- 2020 is on pace to establish a record high for total capital raised for VC funds, but big funds are having most of the success while smaller funds are struggling
Despite predictions of a black swan event amid the worst pandemic in a century that shows little sign of improving soon, venture capital exit activity saw a major uptick in the third quarter, according to the PitchBook-National Venture Capital Association (NVCA) Venture Monitor released Tuesday. Dealmaking and fundraising were both also robust in Los Angeles and beyond.
<p>"L.A. had a very strong quarter," said PitchBook VC Analyst Kyle Stanford. "Los Angeles has completed the third highest number of deals in 2020, behind only San Jose/San Francisco and New York."</p>
<p>If there was weakness to be found, it would be that much of the action is taking place at later stages and bigger funds, not the younger companies and newer funds that dominate Los Angeles. Seed fundraising was anemic in the last quarter. Through Q3, $1.9 billion has been raised across 30 first time funds representing a record low of 3.3% of total capital raised. </p>
<p>Los Angeles saw the fewest number of deals in Q3 since 2016, but also the highest amount of capital invested since that year, mostly due to the nearly $2 billion Elon Musk's SpaceX raised in August. Companies that flourished during the stay-at-home economy also benefited, such as Zwift, a Long-Beach based online fitness platform <a href="https://www.prnewswire.com/news-releases/zwift-raises-450-million-investment-series-c-round-led-by-kkr-301131915.html" rel="noopener noreferrer" target="_blank">that raised nearly half a billion dollars in Series C funding last month. </a></p>
<p>Investors say they were determined to focus more on quality over quantity, paying a premium to fund top startups for the long haul. </p>
<p>"This continues a trend that we were experiencing before COVID, which is larger seed rounds to support a longer runway," said Mark Mullen, co-founder and managing director of Bonfire Ventures, a Santa Monica-based B2B seed fund<a href="https://dot.la/bonfire-ignites-100-million-b2b-fund-ii-exclusive-2647540605.html" target="_self"> that closed a $100 million second fund last month.</a> "Now with COVID and its current and unknown long-term economic effects investors are focusing even more on fewer companies and providing more runway to those companies." </p>
<p>As the stock market surged in the third quarter, companies like Snowflake, Palantir, Asana, and Unity had wildly successful IPOs, putting this year on pace to a record year for exit values, behind only last year. </p>
<p>L.A. saw a number of significant exits like Signal Sciences, <a href="https://www.signalsciences.com/blog/fastly-to-acquire-signal-sciences/" rel="noopener noreferrer" target="_blank">which was acquired for $775 million in August</a>. Blockfolio, a financial management platform, was acquired for $150 million in August. Sense360, a data insights platform, was acquired for $44 million last month. </p>
<p>But overall exit flow was the second lowest going back to 2014, except for the fourth quarter of last year. Still, investors caution that quarterly data should always be taken with a healthy dose of salt.</p>
<p>"It is just a quarter out of tens of quarters," Mullen said. "Deals go up and down in different periods. We have had three profitable exits in the last six months in L.A., which is our most in a six-month period. M & A in the world was way down in Q2 and Q3 due to COVID and is now having a resurgence."</p>
<p>Mullen added an optimistic note. "You may see a record Q4 and Q1 2021," he predicted.</p>
<p>As LPs seek out growth in a low-interest rate environment that looks like it will last for years, venture funds have raised a record $56.6 billion across 228 vehicles since the beginning of the year, which is already more than the $54.9 billion raised in all of last year. But big established funds like <a href="https://pitchbook.com/profiles/investor/11191-96" rel="noopener noreferrer" target="_blank">Greylock Partners</a> Fund XVI of $1.0 billion and <a href="https://pitchbook.com/profiles/investor/11240-47" rel="noopener noreferrer" target="_blank">Meritech Capital Partners</a>' Fund VII of $817.9 million are eating up most of the pie, while first time funds face a "herculean task" to raise capital, according to the NVCA. </p>
<p>"The consolidation of capital continues toward larger, later stage companies and established VC funds," said Bobby Franklin, president & CEO of NVCA, in a written statement. "While both of these trends are potential signs of concern for the long-term health of the VC lifecycle, overall the ecosystem has shown strong resiliency in the past six months."</p>
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Just 140 startup deals were completed in the second quarter of 2020 in greater Los Angeles, according to the latest PitchBook-NVCA Venture Monitor released Tuesday. That is the fewest since Pitchbook and the National Venture Capital Association began tracking the data in 2014.
By comparison, there were 216 deals in the first quarter of 2020 and 210 during the second quarter of 2019. Total capital invested in the last quarter was cut in half from the frenzied first quarter of 2020, though investment was slightly ahead of the last quarter of 2019.
<p>"While we continue to see a lot of opportunities, we have slowed down," said Eric Manlunas, founder & managing partner of <a href="https://wavemaker.vc/" target="_blank">Wavemaker Partners,</a> a cross-border, early-stage firm headquartered in Los Angeles and Singapore. "It's a function of being defensive and of raising the bar."</p><p>Top deals included SpaceX's $346 million round, Aspiration's $135 Series D, and Service Titan's $74 Series E.</p><p>Meanwhile, there were just seven exits among local startups, the fewest since 2017. They included Inari Medical, an Irvine company that develops medical devices, <a href="https://www.marketwatch.com/story/inari-medicals-stock-blasts-off-trades-more-than-double-the-ipo-price-2020-05-22" target="_blank">which went public in May</a>, and <a href="https://www.theverge.com/2020/5/14/21211254/apple-confirms-nextvr-acquisition-purchase-vr-virtual-reality-company" target="_blank">Apple's acquisition of Next VR,</a> which records live events to be experienced in VR. </p><p>The local slowdown mirrors one seen nationally in the past quarter as the coronavirus moved dealmaking online and forced portfolio companies to focus on reducing their burn rate by cutting costs and shelving expansion plans. 2020 is on track for the fewest number of exits since 2011.</p><p>"With all that said, the impact on aggregate VC activity was hardly apocalyptic," wrote the authors of the report. "Much of the slowdown occurred during the early part of the quarter, when uncertainty over COVID-19's impact on the economy was at its height. After the initial month and a half of exercising caution, triaging, and focusing primarily on stabilizing their own portfolio companies, VC investing began to pick up in May."</p><h2>Here are three takeaways from the report:</h2><h3>Fundraising Activity: Bigger is Better</h3><p>Through the first half of the year, U.S. VCs closed 148 funds totaling more than $42.7 billion, which has already surpassed the full-year total for every year of the decade except 2016, 2018 and 2019. VC mega-funds ($500 million+) have been especially prolific in 2020 with 23 closed so far — nearly equal to the full-year number for 2019. This uptick in outsized funds drove the 2020 median fund size back over $100 million for the first time since 2007, and also contributed to a spike in the average fund size to $300.9 million. </p><p>Notable large funds that closed this quarter include <a href="https://pitchbook.com/profiles/investor/10123-03#overview" target="_blank">General Catalyst</a> with a $2.3 billion vehicle and a trio of <a href="https://pitchbook.com/profiles/investor/11333-26" target="_blank">Lightspeed Venture</a> funds each over $890 million. Much of the success of established VCs has to do with their positive past performance and name recognition, which has been particularly helpful in a period when no face-to-face meetings are taking place. </p><p>First-time funds have seen a noticeable drop in new closed funds through Q2 2020, only raising $1.5 billion across 14 vehicles. This is likely due to an inability to capitalize on existing investor relationships, and it doesn't look like first-time fundraising activity will rebound in 2020, as economic uncertainty could encourage LPs to cut down on new allocations to VC, especially to unproven managers. </p><h3>Exit Activity </h3><p>By quarter's end, exit counts showed the extent of the steep decline that began with the onset of COVID-19 in March. </p><p>Only 147 exits closed in Q2, worth $21.2 billion. It's hard to measure these figures against 2019 given the massive IPOs that closed last year, but exit values are pacing to drop back towards levels seen pre-2017. Given the exit market provides the release valve to the massive amount of capital that has built up in VC, without a functioning pathway to liquidity, the whole industry could suffer. </p><p>On the IPO front, there was some positive momentum toward the end of Q2 with companies outside of the biotech industry or special purpose acquisition companies (SPACs) completing or filing for public listings. As an example, the <a href="https://pitchbook.com/profiles/company/120442-24#overview" target="_blank">Vroom</a> IPO valued the car selling platform at just over $2 billion, which is especially notable as the automobile space has been significantly impacted by the pandemic, potentially implying that the IPO window could be open for a wide swath of startups. </p><p>Although the pandemic's effects on potential liquidity haven't yet reached the dire levels we saw from 2008 through 2010, the next couple of years still hold plenty of uncertainty that may further depress activity. </p><h3>Investment Activity </h3><p>Venture deal activity slowed in the second quarter with $34.3 billion invested across 2,197 deals, a 23.2% decline in deal count compared to Q1 2020. </p><p>While angel activity stayed relatively steady, completed seed deals saw a massive slowdown in Q2. It's also unlikely that 2020 will see the third consecutive year of early-stage investments exceeding $40 billion, as investors reevaluate portfolios and shore up balance sheets for the quarters to come. </p><p>Investors have also doubled down on portfolio companies as follow-on financing activity heavily outweighed first-time financings during Q2. Unexpectedly, there has not been a drop in late-stage activity with deal count tracking at a higher pace than 2019. 57 late-stage mega-deals ($100 million+) closed this quarter, bringing the total of late-stage mega-deals to more than 100 so far in 2020, easily on track to surpass the 175 closed in 2019. These high figures can be attributed to some sectors realizing newfound growth and capitalizing on capital availability while other sectors experienced disruption to growth and needed to raise unplanned rounds to weather the market downturn. </p><p>Nontraditional participation did not subside through Q2, either, as corporate VCs participated in 26% of all U.S. VC deals, a new high. PE firms have been investors in 13.9% of VC deals, a higher level than any previous full-year figure. </p>
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Santa Monica-based Bird could benefit from a post COVID-19 world where fewer people are using public transportation, especially in urban areas in Europe and Asia where car ownership is more expensive, according to an optimistic new research note published by Pitchbook.
"We believe the thesis for shared mobility remains intact, and expect public aversion to mass transit to drive a $15 billion addressable market expansion for the industry," Asad Hussain, an emerging technology analyst at Pitchbook, wrote late Wednesday . "Anecdotally, we are hearing of an uptick in interest in mobility among investors seeing the light at the end of the tunnel."
<p>As of earlier this month, public transportation ridership was down approximately 70% in the U,S and 80% in Italy and France. <a href="https://thesource.metro.net/2020/05/14/metro-to-pursue-four-phase-plan-to-restore-bus-and-rail-service/" target="_blank">Metro ridership in Los Angeles has fallen</a> from about 1.2 million average weekday boardings to 360,000.</p><p>Scooters have often been billed as a compliment to public transportation, <a href="https://urbanmobilitydaily.com/has-public-transit-finally-found-its-first-mile-last-mile-partner-in-micromobility/" target="_blank">helping riders reach the "last mile."</a> However, Bird is already seeing evidence riders are replacing buses and trains with scooters, a habit the company is optimistic will stick. Bird also hopes that the <a href="https://www.nbclosangeles.com/news/local/las-slow-streets-program-closes-streets-to-provide-space-for-activity/2363020/" target="_blank">closing of city streets during the pandemic</a> could make using scooters more appealing since they have always struggled with being too fast for sidewalks and too slow for weaving in and out of vehicle traffic.</p><p>"Over the past month, we've seen sustained increases in trip duration of more than 50%," wrote Ryan Fujiu, chief product officer at Bird <a href="https://www.bird.co/blog/scooter-riders-making-comeback-riding-longer-than-ever/" target="_blank">in a blog post.</a> "Initially we attributed this to a desire to be back outdoors experiencing fresh air and open space, but we're seeing strong indications that it may be a much longer-term trend related to things like public transit concerns nearly a thousand miles of new open streets and a spike in the construction of protected cycling infrastructure."</p><p>Last month, cash-strapped Lime <a href="https://www.google.com/search?q=lime+raised+funding&oq=lime+raised+funding&aqs=chrome..69i57j69i59j69i60l3j69i61j69i65j69i60.2675j0j9&sourceid=chrome&ie=UTF-8" target="_blank">raised emergency funding at a steep 80% discount</a>, with Uber as the lead investor. Bird had the good fortune to raise new financing this year before the coronavirus slashed valuations but still has tried to preserve cash, <a href="https://dot.la/bird-layoffs-meeting-story-2645612465.html" target="_self">laying off 40% of its workforce in a widely criticized Zoom call at the end of March.</a> More deals and consolidation could likely be ahead. </p><p>"The pandemic will exacerbate a trend that we were already starting to see early signs of, which is consolidation in the industry," said Daniel Hoffer, managing director of Autotech Ventures.</p>Meanwhile, <a href="https://twitter.com/BirdRide/status/1265649858968317953" target="_blank">Bird unveiled its latest new feature Wednesday called Quick Start,</a> which allows riders to activate a nearby scooter via bluetooth on their mobile phone simply by walking towards it instead of scanning a QR code. Bird says early testing shows the new process, which is gradually being rolled out to markets, cuts the time it takes to unlock a scooter in half.
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