Despite the economic volatility in the US and COVID-19 pandemic — the venture capital (VC) and startup ecosystem have broadly spoken, been resilient in 2020. Pitchbook and CB Insights report provides a detailed overview of venture capital funding in Q3 in 2020. Most VCs have adapted to new, remote ways of doing business and capital invested continued at a strong pace in the third quarter. VC investments to US-based, VC-backed companies hit a 7-quarter high in Q3’20 at $36.5B, up 22% year-over-year (YoY), and 30% from Q2’20.
The startup ecosystem appears to be responding admirably to the grave challenges currently facing the US. Startups and entrepreneurs look to be moving aggressively to address the major challenges of our time: climate change, healthcare and COVID-19.
Moreover, Crunchbase data shows increased investment between Q1 and Q3 2020 versus the same period in 2019 in health care, apps, payments, education, and gaming.
This surge in investment over the last two quarters could result in a five to 10 year boost for the industry.
While traditional IPOs are a good option for high-growth companies in the current climate, an alternative way to go public has gained popularity in the ecosystem: the special purpose acquisition company (SPAC).
Not all trends in the ecosystem have been positive. The number of seed and early-stage VC investments has rapidly declined, and we have seen an even steeper reduction in the number of first financings for startups, which reached a 10-year low in Q3.
Seed and Angel Investment
As the seed market continues its sluggish pace through Q3, angel investments have remained rather resilient. At $2.6 billion, seed funding in the third quarter was down 32 percent year over year and down 11 percent quarter over quarter. It’s worth keeping in mind that seed is the stage with the most extensive reporting delays, as smaller seed fundings are often not reported via the news cycle, but added by founders over time.
With deal sourcing moving online, the first major challenge COVID-19 brought to the venture market has slowly lessened overthe third quarter as the industry adjusted to the digital setup. With deal sourcing moving online, the first major challenge COVID-19 brought to the venture market has slowly lessened over the third quarter as the industry adjusted to the digital setup.
Early-stage VC deal activity showed signs of rebounding in Q3 2020 with $9.2 billion raised across 657 deals, bringing the YTD total to $27.7 billion across 2,351 deals. However, early-stage VC deal activity in 2020 is unlikely to match the 2019 activity.
After a lackluster Q2, early-stage investors are becoming more comfortable investing in this “new normal” – reports Pitchbook.
Many investors have begun to step outside their comfort zones and embrace deals from entrepreneurs beyond their immediate network, particularly in sectors that accelerated due to the ongoing pandemic, such as telemedicine and education technology.
Healthcare Venture funding
Notably, 19 of the 25 largest early-stage VC deals in Q3 were in healthcare. Rock Health reports $4 billion in funding for U.S. digital health startups this quarter, much of which was driven by a flurry of telehealth investments and late-stage rounds for R&D and fitness tech companies.
That said, 2020 is the largest funding year ever for digital health. The $4.0B invested in US-based digital health startups through Q3 brings the year’s running total to $9.4B. At least $2.4B has been invested each quarter this year—consistently above the quarterly average of $2.1B across 2018-2019.
Communities and their healthcare infrastructure are bracing for future waves of COVID-19—potentially compounded by flu season. Provider systems and practices with depleted finances face the potential of months of lower utilization and a shifting payer mix with more Medicaid, individually insured, and uninsured patients.
It is unlikely that the economy, healthcare, or our personal lives will return to the “old normal” any time soon.
Twenty-four (24) digital health companies have raised mega deals of $100M or more through Q3 of 2020.This already doubles the previous annual record of 12 mega deals set in 2018. Mega deals account for well over one-third (41%) of total digital health funding so far this year with connected fitness company Zwift raising the largest round so far—$450M in Series C funding.
The rise in mega deals reflects a trend towards capital concentration in digital health venture investment. Funding for companies that offer telemedicine specifically saw a significant spike from Q1-Q3 2020 compared to Q1-Q3 2019—$1.6B in funding compared to $662M, an over two-fold increase.
Driven by the near shutdown of our traditional healthcare system for in-person visits, utilization of the former—synchronous patient-provider visits—have skyrocketed. By one estimate, telemedicine claims in the US rose by over 4000% between June 2019 and June 2020.
Telemedicine will keep rising and we can expect to see this industry to receive more funding in 2021.