In the second quarter, US venture capital investment was surprisingly consistent from previous quarters and actually topped the average over the last twelve quarters. This quarter we continued seeing the trend of fewer but larger deals, with volume in the second quarter falling 23% from the first to approximately 2,200 deals. However, overall value consideration during the quarter was $34.3 billion, a decline of only 4.5% from the first quarter but just a 1.3% from the quarter a year ago. This fewer-but-larger deal trend has progressed over the last five quarters now and signals that investors are more cautious with their funds but are simultaneous more willing to deploy capital into what they perceive to be high-quality companies with strong growth prospects.
As the “corona-economy” slowed, so too did the demand for acquisitions and initial public offerings. The year is currently on pace to be the lowest exit year for VC firms since 2011, with the number of exits in the second quarter being the lowest in more than ten years. This intuitively makes sense since valuations were also down, and, with the market recovering in the latter half of the second quarter and into the third, we would expect that to have a positive impact on venture capitalists selling or IPOing their portfolio companies.
On the bright side, fundraising has never been more robust, with $42.7 billion raised in the first half, with 2020 projected activity to become a record by year-end. Venture capital dry powder – cash waiting to be deployed – is estimated to be well over $100 billion, demonstrating that investors have the capital to invest in the right opportunities and at the right time.
While we believe that late-quarter momentum will be a positive going into the third quarter, there are still significant uncertainties and headwinds, the largest being an increasing rate of new cases of the coronavirus as economies have attempted to reopen.
A copy of the full report is available here.