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2020, 2021 and the EC/VC Industry – Review of the Past Year and Predictions for the Current One

In the beginning of February 2020, COVID-19 seemed to have little to no impact on venture capital investing in the United States.  Fast forward a few weeks later: concerns quickly spread over the entire industry about the effects of the COVID-19 pandemic on venture investing, its impact on startup companies and the U.S. economy in general.  Emerging growth companies instantly went into “conserve cash mode” and applied for PPP loans.

Looking back today, the data has shown that these fears were mostly unfounded, as this past year turned out to be a banner year for the U.S. venture capital industry.  Here are some key takeaways:

  • First, PitchBook data shows that venture-backed companies raised $147.9 billion in 2020, which is actually $10 billion more than in 2019. However, the actual number of venture capital financings, compared year to year, dropped by approximately 2,000 to 10,379 in 2020[1].  Second, after the bottom dropped out of the stock market in late February, it quickly recovered, welcoming approximately 120 VC-backed IPOs with over $250 billion in aggregate exit value, as compared to only $215 billion in 2019.[2]

  • Venture capital mega-funds (assets under management of $1 billion or more) and mega-rounds ($100 million or more) in 2020 also substantially surpassed 2019, with 14 new venture capital mega-funds for a total value of $27 billion, and 306 new mega-rounds for a total value of $68 billion.[3]

2020 also ended up being an outstanding year for venture-backed company M&A.  Last year, 41 venture-back companies were acquired for more than $1 billion, totaling $104 billion in sales, making the year the highest count and amount for billion-dollar exits over the past decade.[4]

After 2020 proved to be entirely unpredictable, is it even realistic to try to envision what 2021 will bring?  What we do know with certainty is that the pandemic impacted entire lines of business, disrupted our personal and professional lives, and its impact continues through the present.

As a result of this disruption, we believe that new opportunities now exist for entrepreneurs and VCs, including in previously untapped areas.  What these opportunities vary from industry to industry and sometimes even within given segments of an industry.  For instance, the healthcare industry is (unsurprisingly) booming since the beginning the pandemic and has and is continuing to go through tremendous change.  These changes, however, can be radically different depending on the subsection of the healthcare industry.  Consider the following: on one hand, due to declines in admissions and patient visits because of COVID-19, the American Hospital Association estimates that hospitals lost more than $323 billion from March 2020 through December 2020.[5]  We anticipate this will lead to massive layoffs, reorganizations, and other similar consequences, which will permanently affect the traditional brick-and-mortar healthcare business model.  On the other hand, the pandemic pushed the rise of telemedicine, with healthcare startups offering viable alternatives to in-person care and similar services, and, consequently, these companies received a significant increase in attention (and financing[6]) from VC funds last year.

We believe that just as telemedicine is shaping the future of healthcare, new developments will impact other industries in the short term and long run in 2021 as the U.S emerges from the pandemic.  For example, many companies in 2020, such as Zoom, Inc., gained a great deal of traction due to increased work from home and the suspension of business travel.

On the other side, hospitality and travel are hanging on by a thread, and the fate of companies involved in these industries remains unknown.  How and to what extent the trends we saw emerge in 2020 will continue in 2021 as businesses reopen and travel restrictions are lifted is anyone’s guess. As COVID-19 continues to challenge us to change our previously accepted norms in 2021 both traditional businesses and internet-based models will continue to be equally impacted: theaters, restaurants, coworking spaces, and ride-sharing and vacation rental services remain under economic stress because they involve social gathering, travel and entertainment, which are on-pause—at least for now.  Similarly, whether the specific opportunity for investment in a given company will be more attractive growth capital or distressed M&A (or perhaps something in between) remains to be seen.

For VCs and entrepreneurs, the issue in 2021 that remains to be determined is whether COVID-19 will have a temporary or permanent impact on certain sectors.  For instance, hundreds of millions of people have been largely working from home for a full year now.  Many businesses are currently considering whether their home office needs such a significant real estate footprint, whether they should follow the path many of their employees took and open more suburban offices and whether work from home should be the exception, the norm or a hybrid. The way people commute, work and live together has been clearly impacted by this pandemic and has made business leaders realize that many of the truisms about how a business needs to operate are no longer entirely correct (or at the very least, is evolving).  This realization creates a whole new field of opportunities, but also could be the death knell for certain industries unless they learn to adapt and change with the times. One thing is certain – a question that will be asked in funding pitches for the foreseeable future will be how the business seeking capital can not only survive but thrive during a pandemic.

FOOTNOTES

[1] https://pitchbook.com/news/articles/2020-vc-in-charts

[2] https://pitchbook.com/news/articles/2020-vc-in-charts

[3] https://pitchbook.com/news/articles/2020-vc-in-charts

[4] https://news.crunchbase.com/news/global-2020-funding-and-exit/ (excluded M&A for companies that previously went public.

[5] https://news.bloomberglaw.com/health-law-and-business/hospitals-lose-money-volume-as-covid-fears-keep-patients-away

[6] https://www.beckershospitalreview.com/digital-transformation/telemedicine-tops-digital-health-funding-in-2020-at-3-2b-4-things-to-know.html

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Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XI, Number 81
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Karl Buhler Sheppard Mullin Corporate Intellectual Property International Reach France
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Karl Buhler is an associate in the Corporate and Securities Practice Group and French Desk in the firm's New York Office.

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Karl’s practice primarily focuses on domestic and cross-border transactions (with special emphasis on operations involving French companies). He has experience in mergers, acquisitions, joint ventures, and complex commercial agreements in a variety of industries such as technology, communications, life sciences, energy, defense and aerospace. In particular, he advises foreign companies with the installation and...

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John Hempill, Corporate Lawyer, Sheppard Mullin, private and public finance
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Mr. John Hempill is a partner in the Corporate Practice Group in the firm's New York office.

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John Hempill is counsel to a number of companies in various industries. He has extensive experience in private and public finance, ranging from representing private emerging growth companies, venture capital funds and strategic investors in seed rounds and later stage private financings, to representing public companies and investment banks in public offerings, as well as 144A and PIPE financings.

Mr. Hempill is also an experienced mergers and...

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Farha Chowdry Corporate Attorney Sheppard Mullin Silicon Valley, CA
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Farha Chowdry is a partner in the Corporate Practice Group in the firm’s Palo Alto and San Diego (Del Mar) offices.

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Farha has extensive experience in general corporate transactional matters. She works with emerging growth companies through all stages of their lifecycle and venture capital funds in their negotiation, structuring and maintenance of portfolio company investments. Farha also represents clients in complex merger and acquisition transactions. She routinely advises clients in both acquisitions and dispositions of companies and...

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