- Investors trying to create their first venture funds as well as startup founders seeking financing for the first time have been left out of the VC industry's rebound in recent months, according to a new report from Pitchbook and the National Venture Capital Association.
- The uncertainty created by the pandemic is partly responsible, as investors became wary of taking new risks and doubled down on the funds and startups they knew well.
- While it's hard to make any long-term conclusions from the data, one expert told Business Insider that these trends are "potential signs of concern for the long-term health of the VC lifecycle," which relies on the new entrepreneurs.
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For many big-name venture capitalists and startup unicorns, business was great during the pandemic summer, with a record number of VC mega-deals and a red-hot IPO market delivering lucrative returns for investors.
But that generally hasn't been the case for those trying to create their first venture funds, nor for founders seeking their first round of startup financing, according to a report released by Pitchbook and the National Venture Capital Association (NVCA).
That's in part because the uncertainty created by the pandemic has made investors more wary of starting their own funds. That uncertainty also prompted existing venture capitalists to double down on existing portfolio companies rather than take chances on unknowns.
While the overall venture ecosystem has been resilient in the past half year, the "consolidation of capital" towards larger, late-stage companies and established VC funds were "potential signs of concern for the long-term health of the VC lifecycle," NVCA president and CEO Bobby Franklin said in the report.
"First-time funds, being small in nature, are writing very early-stage, small checks, and that's an important part of the ecosystem to make sure that entrepreneurs have the ability to start taking iterations on their ideas and turn them into successful companies," Franklin told Business Insider in a separate interview. "I would not want to see a continued downturn in first-time funds over a long period of time."
While the number of VC mega-funds, or those with over $500 million, reached an all-time high of 35 in the first three-quarters of this year, first-time funds raised only $1.9 billion during that period. That's putting the year far behind the $5.3 billion raised during all of 2019, or the $10.9 billion raised in 2018.
Even more startling: the proportion of first-time fundraising activity compared to total venture capital raised hit a record low of 3.3%, almost three percentage points lower than during the Great Recession in 2008.
True, 2020 isn't over yet but newbie funds would have to have a blow-out fourth quarter of fundraising to catch up, and do so under the shadow of so much allocation going to those megafunds.
"At its current pace, 2020 is tracking to fall short of last year's early-stage activity by 20%- 25%—unsurprising given the stress caused by COVID-19 and the fact that both 2018 and 2019 were record years for the industry," the report says.
The numbers are similar for startups seeking their first-ever funding round. First financings have declined to 23.7% of completed financings in the third quarter, compared with 27.3% for the third quarter last year. Additionally, venture deals for early-stage startups are set to fall short of last year's early-stage activity by 20-25%, according to Pitchbook estimates.
Franklin, however, emphasized that it's too early to make any long-term conclusions about the health of the venture ecosystem.
"This pandemic introduces perhaps whole new possible industries that we should be thinking about now," he said. "And I would expect that those entrepreneurs would find capital formed to support those ideas now that we all have a greater appreciation of the needs and demands for certain things that we might not have thought about just a year ago."
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