What Pandemic? Early-Stage Funding Stays Strong

By Scott Wallask

Young companies and organizations looking for early-stage funding might have reasonably concluded that the Covid-19 pandemic was going to kick plans back months, if not years.

Nope.

Instead, data analyzed by ZoomInfo generally indicates that firms seeking angel or seed funding, private equity, or Series A or B investments have seen an increase in action during the period from April 2019 through April 2020.

Those results may seem counterintuitive considering the turmoil world financial markets were in, but such situations also provide opportunities for investors. While the stock market plummeted during the pandemic, fiscal stimulus packages and interest from investors boosted stock performance back to 2019 levels by July 2020, CNBC reported. However, a recent rise in Covid-19 infections and an expected volatile presidential election create potential setbacks.

All that said, an unstable market doesn’t equate to limited investments. “While it’s likely that startups will need extra support, it’s also well known that some of the best venture-backed businesses were founded and funded in recessionary times,” David Blumberg, founder and managing partner at Blumberg Capital, wrote for Crunchbase News in May 2020. “Examples include Facebook, Microsoft, Nutanix, and Electronic Arts.”

As a quick refresher, seed and angel rounds are small amounts and help a startup get off the ground. Private equity is funding from an equity firm or hedge fund, while series A and B are early-stage rounds that help startups obtain more customers or increase operations.

Seed Funding Rounds are Blooming in 2020

Year over year from April 2019 to April 2020, angel, series A, and series B funding saw increases as detailed below:

  • Angel and seed funding went up 27% YOY.
  • Series A funding went up 15%.
  • Series B funding went up 8%.
Figure 1: Early-stage investments generally showed an uptick from April 2019 to April 2020. Source: ZoomInfo.

Investment firms independently indicated similar patterns of activity.

“We do 200 investments every year,” Candace Widdoes, chief operating officer at early-stage venture capital firm Plug and Play, told Built In. “[In April], we did seven investments. The previous month we did 10 investments, so maybe a tiny drop-off, but we’re still making investments.”

The rise in angel investing, as illustrated by ZoomInfo’s numbers, may confirm that investors not typically involved with seeding are now earmarking funds to the earliest-stage companies.

For example, “Venture capital firms that focused on Series A funding before the pandemic are now joining seed investors in backing early startups, some of New York’s top seed investors said in a virtual panel hosted by Eniac Ventures,” reported Karma, a site that covers sustainable business news.

Private Equity Grew by Leaps and Rounds

Private equity deals ended up lower in April 2020 than they were in April 2019 (a 13% drop YOY).

However, in between those months, private equity experienced dips and then a large bump that peaked at the start of 2020 — going up 400% from November to January before dropping. It is not clear from the data what led to the spike or if it was related to end-of-fiscal-year timing at some companies.

Regardless, private equity investment has remained strong for nearly two decades.

Private equity investment has remained strong for nearly two decades.

“The number of private equity buyouts of startups funded by venture capital grew at an annual rate of 18.1% between 2000 and 2019,” wrote Institutional Investor, reporting on an analyst note in February 2020 from PitchBook.

“That compares to a 9.5% annual growth rate for all buyouts over the same 19-year period,” the article added. “The figures illustrate how private equity firms … are now involved with developing acquisition and other strategies for fast-growing technology and growth businesses. “

Another piece by Crunchbase News further affirmed this growth, showing that from 2009 to 2018, there was a steady rise in private equity rounds globally.

B2B Firms Attract More Startup Funding

On an interesting side note, most of the companies whose venture capital ZoomInfo tracked are business-to-business (B2B) firms versus business-to-consumer (B2C) establishments.

There are several reasons why consumers tend to purchase on trends more than business customers do. Also, businesses are more likely to pay for a product long term as part of revenue goals.

Looking at a slightly different set of data from ZoomInfo, early-stage funding clearly favored B2B companies from April 2019 to April 2020. During that period, 86% of investments went to B2B startups.

Figure 2: B2B startups dwarfed their B2C counterparts in securing early-stage funding. Source: ZoomInfo.

Average Private Equity Round Rings in at Nearly $100 Million

Looking at dollar amounts for early-stage funding from April 2019 to April 2020, the power of private equity investment is clear. Average private equity funds were slightly more than $97 million per deal — almost double the average of angel, series A, and series B investments combined.

Figure 3: Average deal sizes illustrate how valuable private equity investment can be. Source: ZoomInfo.

The private equity numbers are not a surprise; these types of investments are often large and meant to generate additional performance in a company so that it can later be sold or taken public.

Seed and angel funding, which comes from individuals putting money into a startup, averaged a much lower $3.4 million per deal. That is still a significant boost for the earliest-stage companies.

Average series A amounts ($14. 2 million) were roughly four times those of seed funds, while moving to series B saw a big bump in the average deal ($33.7 million)

Pandemic Might Aid New Hiring at Startups

Because of the rampant loss of jobs in the United States — the unemployment rate was 13.3% for May 2020, due largely to the pandemic — startups with funding may be able to get their hands on skilled talent that was not available six months earlier.

“I think that we’re going to see a pretty dramatic shift in the talent market for startups,” Jackie Dimonte, vice president at Hyde Park Venture Partners, told Built In. “Our portfolio companies that are still actively hiring have been able to access folks that I think they wouldn’t have had a chance to hire before.”

“I think that we’re going to see a pretty dramatic shift in the talent market for startups.”

— Jackie Dimonte, Hyde Park Venture Partners

Blumberg agreed, writing that Covid-19-related layoffs are providing startups with opportunities to hire better people and conduct more employee training.

Startups Remain an Attractive Opportunity

Our data strongly suggests that the pandemic has not significantly stopped venture capital plans for startup companies. The year-over-year trend generally shows increased early-stage investment activity in April 2020 compared to April 2019.

In a June 2020 column for Entrepreneur, Shanti Mohan, cofounder of angel investing platform LetsVenture, said startups are risky, yet investors still flock to them.

“So, why do people continue to invest in startups?” Mohan wrote. “The most commonly cited reason is that startups offer a way to stay in touch with the rapid changes in technology and market behaviors, as well as provide investors the lens to see entrepreneurship at a closer range.”

Simply put, startups surviving — and maybe even thriving — in the pandemic brings a different view of innovation that was not there a year ago, and investors are responding.

Scott Wallask is a longtime content writer; seeking stories flowing from data with a dash of skepticism; Northeastern grad

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