A Look at Early Stage Venture Investment Activity in the Preceding Decade and how the Coronavirus (COVID-19) plays into 2020
Co-Founder and Investment Board Member at DataTribe, LLC, Mike Janke
Venture capital investment activity can fluctuate year-to-year due to a variety of reasons ranging from macroeconomic conditions to geopolitical concerns. As an early-stage startup foundry, Datatribe took a look at investment trends over the last decade to understand how the first two months of 2020 compare with the preceding years and how the Coronavirus pandemic may affect early stage venture investment in cyber security in the coming months. For this post, early stage includes the following investment activity: Accelerators; Angels (up to Series A); and Venture Capital (Seed and Series A). The chart below summarizes annual deal activity for all early stage ventures through the preceding decade.
2010 through 2015 was a significant growth period for early stage venture investing. Early year deals in the period grew from 5,082 in 2010 to a peak of 23,074 in 2015, a 28.7% CAGR. Cybersecurity investments were less than 2% of the overall deal activity, but we observe more significant growth of 35.8% annually, from 87 deals in 2010 to 402 in 2015.
2016 through 2018 marked a period of sustained high deal activity in venture investing. Total deals exceed 20,000 annually for the period. Cyber reached a peak of 498 in 2017, exceeding 2% of total activity for the first time, a threshold it retains through present day. 2018 is the first observed decline in cyber deals, down 5.2% from 2017.
2019 is the first year double-digit decline in activity for all early stage investing and for early stage cyber at 12.1% and 12.9%, respectively. U.S. – China trade negotiations, new geopolitical instability (Iran), and an increasingly tense political environment, particularly President Trump’s impeachment proceedings likely affected 2019 activity and investments leading into 2020. The YoY change is summarized in the chart below1.
In looking at the data, we can see that 2020 is trending down with 43 deals in the first two months of the year compared to 103 and 91 in 2018 and 2019, respectively, for early stage investments. Given that the venture investments typically take one to two quarters to close, it’s unlikely that COVID-19 is the driver behind this downdraft in early 2020 deal volume. However, looking ahead we can anticipate that the Coronavirus outbreak will add additional downward pressure to this trend. Health and safety concerns have prompted quarantines, remote work mandates, and voluntary social separation, affecting all industries to varying degrees. February 2020 deal activity is down 62.5% YoY for early stage venture and 55.9% YoY for all stages of cybersecurity venture deals. The chart below1 depicts YoY changes in February deal activity over the preceding decade.
We expect the decline to continue through the close of 2020, in terms of deal activity. Early stage investments will be most affected, with an observed 52.7% decline YTD compared to the same period in 2019. Angels will likely tighten their purse strings to preserve personal assets while the economic impact of the current pandemic remains unknown. However, venture capital money is still available as are the quality founders seeking capital to build great companies. We expect to see the trend of fewer deals continue along with downward valuation pressure. Downturns in the economy can be very active times for select venture capital firms as they view this as a time to get better valued deals.
Despite the decline in deal activity, cybersecurity is perhaps more relevant than ever given the new scale of remote work. This is a great time to invest in quality ventures. For entrepreneurs, money is still available. Deals will be made, though due diligence and closings may take longer. Investors will be more selective though this may ultimately result in bigger checks. Entrepreneurs should focus on startup milestones and metrics more than promising potential and marketing. Regardless of the potential decrease in investments for March, cybersecurity remains critical to governments, businesses, and consumers. Investors continue to fund strong companies – it just might take a little longer.