COVID-19’s Impact on Early Stage Venture Capital

This may actually be one of the best times in history to raise early-stage capital.

Like many in the venture capital ecosystem, we’ve been closely observing the VC market response to the COVID-19 outbreak. Common knowledge at this point is that deal volume is down considerably from pre-crisis times, but less clear is how early-stage startups have been impacted since most coverage we’ve seen is focused on large later-stage funding activity. Also unclear is how much valuations have been compressed (especially in California where VCs have long felt valuations were inflated). And, perhaps most importantly, we’ve wondered if certain market segments have gained or lost favor during a time of heightened volatility and potentially long-lasting economic changes. 

These topics are vital for the founders and investors we interface with to understand, so we set out to answer key questions by analyzing disclosed early-stage VC funding events occurring between March 1st through May 15th of this year versus the same period in 2019.

Are VCs still doing deals?

Yes, but at a significantly lower volume. Early stage deals are down 44% when compared to pre-crisis activity. Seed stage volume is down the most, over 52%, while Series A deals appear much less impacted in terms of deal volume having dropped only 32%. Also, there doesn’t appear to be any renewed interest in CA-based ventures just based on deal volume.

Summary of early stage VC activity during COVID-19 outbreak.
Early-stage VC activity 3/1/20 – 5/15/20 vs the same period in 2019 segmented by stage.
Deal volume Change by Stage

While this may seem gloomy, we do think there are some important mitigating factors to consider. One is that deals are often announced months after they occur, so we expect this gap to close by 10-20% as more data is reported —  especially at the Seed stage where deals are sometimes not disclosed until after a significant post-funding milestone (or even a Series A) is announced. We also suspect many funds have led inside rounds for some of their most heavily impacted, but highly promising, portfolio companies and these deals are not as commonly announced.

Have investors shifted focus to certain industries?

VC funds are typically macro theme-driven — sometimes by interest in a specific emerging technology, but more often by how tech-driven innovation will impact certain segments of the economy. We wanted to understand if the decline in deal activity more heavily impacted certain industries. Relative strength in certain segments could be a sign that venture funds are operating somewhat normally, but are shifting focus based on the sudden change in the business cycle to a recessionary environment. (The perception of where the economy is in terms of the business cycle is an important factor in decision making given that market forces will either lift or crush a startup.)

To determine the impact across industries, we assigned each VC-backed company to an Industry Group, using the Global Industry Classification Standard (GICS), based on each venture’s primary business activity.

VC Deals announced during COVID-19 by industry
VC Deal Volume Decline during COVID-19 by Industry

We can see that there was a precipitous drop across every industry aside from Energy & Sustainability, but not all industries are equally significant to venture market deal volume since some are much more active than others. So we measured each industry’s impact on the overall early-stage venture capital market based on its share of deals in the 2019 period.  From this analysis, we could observe how industries heavily impacted by the outbreak, such as Retail Technology, did have an outsized contribution to the total volume decline.

Industry weighted average contribution to overall early-stage VC deal volume decline

We also observed, perhaps unsurprisingly, that Pharma and Life Sciences ventures were over-represented while Retail and Real Estate were under-represented relative to their share of 2019 deals. In our view, this confirms that investor interest has shifted to industries perceived as more resilient during the depths of this economic crisis.

Relative strength of industries by VC deal volume

Are VCs seeking cheaper startups?

Most surprising to us is that we saw no signs of valuation compression given the huge drop in overall deal volume. In fact, quite the opposite seems to have occurred. While deal volume was down 44%, median deal sizes were up 25% indicating a rather large increase in the typical early-stage valuation. The only exception was the median deal size for Non-California Series A rounds which was down only 8% (overall deal sizes for startups outside California increased the most).

Median deal sizes rose considerably across early-stage VC rounds closed during the COVID-19 crisis.
Median deal sizes rose considerably across early-stage VC rounds closed during the COVID-19 crisis.

Why did deal sizes increase!?

We believe this was due to a survivorship bias. Startups in a weakened position were not conducting deals during the depths of the crisis, so those doing well were so highly sought after by a relatively fixed supply of investors that their valuations rose by a sizable amount.

If this were true, since investors actively deploying capital would continue to seek high-potential deals in the same thematic areas defined by their fund mandates, we’d expect to see an inverse correlation between the decline in deal activity and the rise in median deal size in a given industry… and in fact we do see that trend in our sample data.

Survivorship bias in VC is driving up valuations. As deal volume declines, median deal size increases.

Ironically, despite the market volatility, this might actually be the all-time best seller’s market for startups that are thriving through COVID-19.  As startups who have delayed capital raises get back to the negotiating table, we expect to see a regression to deal sizes closer to pre-crisis levels. We’ll be keeping a close eye on this to see if this trend continues or reverses.

When will the rebound happen?

Investors go where the deals are to be found, and they try to get to them well before others do. A big question is if industries like Retail Technology and Real Estate are going to see a big positive bounce in the coming months.

As a point of consideration for the longer term, the financial sector recovered over a volatile 24 month period following 9/11, but it just finally recovered in February from the ruin of the Global Financial Crisis nearly 13 years later! 

With speculation swirling around the sustainability of urban commercial real estate as an asset class, there may be a similarly long period of creative destruction ahead of it that, while harmful to incumbents, benefits founders and VCs for a long time to come.

Should my startup raise capital now or wait?

If your metrics are strong, we advise moving forward with a capital raise now. Based on our analysis, this may be an excellent environment to pit interested investors against each other to strike deal terms more favorable than may be found in a few months’ time.

For founders who are less certain, take the opportunity to network with likely investors well ahead of a raise to form relationships and get a sense of where the market is. Approach conversations with a primary objective of collecting feedback. Perhaps a deal at this time is more viable than you think, and if not, the ongoing dialogues will make the process smoother for you as the market recovers.

In terms of the availability of dry powder, venture funds will still be deploying capital for the foreseeable future. A prolonged market shock could cause trouble for fund managers attempting to raise new funds, but the impact of this would be a bigger factor in 2021. In the event of a prolonged, U-shaped, recovery, our outlook is that if public market growth expectations are lower, venture capital returns will look more attractive relative to equities and this will benefit the startup ecosystem.


Harlan Milkove is a repeat VC-backed startup founder, and Managing Partner at Foundational where he works with early-stage startups to expedite their pursuit of venture capital. His prior venture Reonomy, a commercial real estate data analytics platform, has gone on to raise $125M+.

Research Methodology

We analyzed all 1,196 deals disclosed in Crunchbase between $500,000 and $25,000,000 identified as Seed, Series A, or Series B funding events that occurred between March 1, 2020 and May 15, 2020 and the same period in 2019.

We chose GICS as an industry grouping standard because it’s long been an accepted system to categorize companies based on their principal business activity and to contextualize public markets in terms of the business cycle. We felt viewing venture deals through this lens would also be effective for understanding how venture capitalists may be viewing where we are in the cycle, by observing which industries are most and least active heading into the recovery from COVID-19. To perform our analysis we assigned each funded company to its closest affiliated GICS Industry Group. We decided on the Industry Group level because its 24 categorizations were granular enough to adequately segment deal activity without losing statistical relevance when studying the sample set. 

Industry Groups were not selected based on a company’s underlying technology, but rather what audience they served with it (their principal business activity). While many startups create infrastructure for other companies to build upon, most are approaching a specific problem space. Mobot, for example, creates a robot that helps developers more reliably test different mobile application builds so they were categorized under Software & Services rather than Hardware. 

There were challenges finding the right bucket for startups who are often attempting to create new market segments using a standard designed for more traditional publicly traded companies. We decided Energy was the best fit for alternative energy ventures, for example, even though that Industry Group consists entirely of fossil fuel companies in the public markets. 

The point is that this exercise took some judgment on the part of our team, but the rules we used were consistently applied. One takeaway we formed is that the harder it is to figure out what GICS industry a startup falls into, the more disruptive potential it has.


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