The Q2 2020 venture capital market did not bring a catastrophic slowdown to either the global private investment scene or the U.S.’s own VC scene. But inside the rosier-than-anticipated private capital results of the second quarter, there were pockets of weakness, and strength, that we should understand as we look to the rest of 2020 and the continuance of the pandemic-driven economy.
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This morning we’re exploring trends detailed in the PitchBook-NVCA Q2 venture report, adding to our coverage of similar data sets produced by competing venture and private business information sources CB Insights and Crunchbase.
The NVCA data provides a useful cross section of venture activity beyond the usual quarterly totals, allowing us to better understand the diverging fortunes of domestic venture investment into business-serving startups (which appear strong), and investments into consumer-serving startups (which appear weak).
It also provides a peek into AI/ML-focused investing, a topic that TechCrunch has covered extensively this year. And, finally, we have a lens into recent U.S. VC results for startups that have at least one female founder, or were founded by all-women teams.
Some of the news is positive, and some of it is less so. But we owe it to ourselves to understand all of it. So to wrap up our week’s dive into Q2 VC activity, let’s get into our final look at the data, focusing today on the nuances of the United States’s own venture results.
B2B’s rise continues
As 2019 came to a close, TechCrunch wrote about a notable trend: Seed investors shifted their attention from consumer-focused startups to business-focused startups. Seed deals had moved from majority-B2C to majority-B2B, in other words.
Why the changeover happened was a big enough question that TechCrunch asked a number of VCs for answers, which included rapidly changing consumer preferences and rising costs to reach possible consumer customers, which made B2B investments more attractive. Regardless of how you read that situation, the trend that private investors are focused more on B2B startups than B2C efforts continued in Q2 2020.
Per the PitchBook-NVCA dataset, here’s how data shakes out once we add the United States’s Q1 and Q2 results and compare them to historical yearly totals:
- B2C startup VC rounds, Q1 and Q2 2020: 1,174 deals worth $19.1 billion
- B2C startup VC rounds, 2019: 2,932 deals worth $40.3 billion
- B2B startup VC totals, Q1 and Q2 2020: 2,101 deals worth $34.2 billion
- B2B startup VC totals, 2019: 4,968 deals worth $61.3 billion
In B2C venture deals we can see both falling deal volume and falling dollars invested, if Q3 and Q4 of the year look like the first half of the year. In B2B investing, we can see that deals are down a little, but dollars invested in the category are on pace to best 2019’s results.
For reference, 2019’s B2B venture totals in the United States were the best ever in terms of deals and dollars, according to the report. In contrast, 2020’s B2C investing results are not set to best 2019’s, and 2019’s own B2C deal volume was only its fifth best year on record, though it was second best in terms of dollars invested.
2020 B2B investing, then, is challenging records while 2020 B2C investing is falling short of already-diminished results. Our read here can be simple: The trend toward VCs investing in B2B startups in the United States that came to a head in 2019 at least regarding seed deals has continued to the detriment of B2C startups’ ability to attract private capital as they once did.
AI/ML startups look to power up
AI/ML-focused startups are having a somewhat strange year, data says. On one hand, startups that use modern computing to learn patterns and filter data for humans are on a tear: At their Q1 and Q2 pace, AI/ML startups on track to raise a record $26 billion in the US this year.
At the same time, deal volume for the same companies appears set to land around 1,250 deals, lower than the 1,556 and 1,457 deals seen in 2019 and 2018, respectively. Later-stage venture activity is taking a larger cut of total VC dollars flowing to these startups.
For the already-established AL/ML startup, the news is good: the capital that they need is on offer. But for the more nascent AI/ML firm, the picture could prove more bleak. In a testament to this shift, the average deal size for an AI/ML startup increased from $16.2 million in 2019 to $23.1 million at the end of Q2 2020. That’s a sharp change.
It’s hard to call a sector on pace for an all-time record venture capital investment total troubled, but the seeming squeeze on earlier-stage AI/ML startups is something we’ll keep an eye on.
All-women startup teams’ fundraising results
As we learned when talking to Charles Hudson for Extra Crunch Live earlier this year, there’s some concern in venture circles that pandemic-led changes to VC investing could drive money into more conservative bets, perhaps limiting access to capital for women. New data suggests that those concerns carry weight.
Startups that have at least one woman founder are not on track to have a very good year:
- Q1 and Q2 2020 VC results for startups with at least one woman founder: 1,031 deals worth $8.9 billion
- 2019 VC results for startups with at least one woman founder: 2,581 deals worth $19.1 billion
Startups that were founded by all women teams are doing even worse:
- Q1 and Q2 2020 VC results for startups with all-women founders: 280 deals worth $1.4 billion
- 2019 VC results for startups with all-women founders: 743 deals worth $3.4 billion
Startups with at least one woman founder are on track to effectively match their 2019 investment totals in dollar-terms, essentially matching their 2018 result, as well. While deal volume for this startup cohort is a bit weaker than previous years, at least the dollars are still available.
For startups founded by only women, years of gains appear set to falter as 2020’s results put the group on pace for its worst deal result since 2016 and worst dollar result since 2017, looking at which year last posted a result that falls below 2020’s pace to-date.
This is a disappointment. While the progress of women-founded startups was slow, it was at least steady. Now, some key progress in diversifying who gets funded in startup-land appears to at least slow, if not reverse.
From where we sit today, we’re caught up on Q2 VC. Now, let’s see what Q3 will bring to startups both domestic and global.