COVID-19 Impact on Early vs Late Stage Funding: A Data-Driven Analysis

COVID-19 has had unforeseen and unpredictable impacts on many industries, including Venture Capital. VC, an industry predicated on personal relationships and accessibility, now needed to operate virtually. Did early stage companies shift their focus from their next funding round to staying afloat? Did late stage companies take a second look at potential sales cycle disruption and employee safety? Here at A-Level Capital, we wanted to quantify COVID-19’s impact on the VC space. We wanted to answer questions like how has VC funding changed since the onset of COVID? Has it changed at all? And perhaps most importantly, is the VC space resilient?

To answer these questions, we conducted a high-level, data-driven analysis of VC activity from Q4 2019 all the way through the present, Q2 2020. Venture funding history data was obtained from whogotfunded.com, a free online service that aggregates data through mass web text scraping. The data was then verified and supplemented via Crunchbase. All deals were based in the US. The data and code can be found here.

To start, let’s look at the frequency of venture funding over time.

These three figures show the number of rounds raised per day, from Q4 2019 through Q2 2020. Daily, weekly, and monthly frequency windows are shown.

Here are some key observations:

• There’s a clear decrease in the number of rounds raised in Q1/Q2 2020 as compared to Q4 2019.
• This decrease in rounds raised appears to line up with increased COVID awareness in the US, which started around March (blue shaded region).
• This decrease appears to start around when the WHO declared COVID a global public health emergency (orange shaded region).
• The decline doesn’t continue into Q2 2020 — round frequency plateaus instead.

We can see that number of rounds raised has decreased into 2020, presumably due to lock-down procedures, quarantine across the US, and the general disruption of VC daily activities.

Let’s now look at trends in the size of these rounds.

Here’s a graph of the average daily round size over this time frame. The line shown is the average round size and the shaded regions represent one standard deviation of a Gaussian distribution of the other rounds that day. Basically, the shaded distributions give us a good idea of the diversity of round type raised that day. Q4 2019 has a pretty wide range of round sizes, whereas in Q1/Q2 2020 round sizes are much more uniform.

When we compare these trends in average round size to our earlier graphs of monthly deal frequency, we see a really interesting pattern.

• Average round size is much higher in Q1/Q2 2020 than Q4 2019. However, 2020 has seen a clear decline in rounds per week.
• So less deals are happening in 2020, but the round average is getting significantly higher??

Here’s the earlier two graphs on top of each other. Keep in mind that the y axis units here are non-important, but you can see pretty clearly that deal volume is going down as round average goes up.

• We can hypothesize that this either means (1) not many late stage companies raised venture funding in Q4 2019, or more likely (2) COVID onset has really impacted early-stage startups raising rounds. The first option’s unlikely because the shading on the Q4 portion of the graph means there’s actually a lot of round diversity in Q4 2019!
• We can speculate large companies generally have the resources in place to weather out COVID’s impact, at least enough to complete their scheduled fundraising rounds. Smaller companies however might be having a harder time adapting to these changes and as a result, be pushing off their funding rounds to focus on more immediate priorities.

From these trends in the data, our standing hypothesis is that COVID-19 has had the most disruptive impact on early stage companies, causing them to push their funding and as a result, raise the observed average round size in Q1/Q2 2020.

Let’s see if this is reflected on a state level as well.

The top 3 states with the most VC investment are New York, California, and Massachusetts.

Taking a closer look at New York:

There’s a clear spike in round size in late March and April, right around when COVID was hitting the hardest in NY. This is really interesting, because even if we hypothesize small startups weren’t raising as many rounds in 2020, this spike still indicates that more large NY-based companies were raising rounds than normal. This large of a round size uptick is definitely unexpected.

Also, deals per week are down in Q1 2020 but actually rebound quite quickly in Q2 2020! The NY VC space is quite resilient!

Taking a closer look at California:

Average round size in CA resembles the overall data trend much more than NY does, probably because CA-based companies raised 2–3x more rounds than NY and made up a large portion of the overall data. We see the expected increase in round size ~March 2020, supporting our hypothesis.

There’s also a decrease in the number of rounds per week starting in Q1 2020. However unlike New York, there’s no deal flow rebound in Q2 2020. It looks like the NY VC space is a little more resilient than California’s, which is probably still suffering the effects of COVID’s impact.

Taking a closer look at Massachusetts:

Again in Massachusetts, we see a spike in round size in April 2020, coinciding directly with COVID’s impact on Boston. Here we see trends similar to CA in that round size has been consistently high in 2020. We also see trends similar to NY with the spike in April. From this we can speculate that early-stage startups in MA have been feeling COVID’s pressure since early 2020.

Deals per week show a lull in Q1 2020 and then a quick rebound in Q2 2020, indicating like NY, resiliency in the VC space.

Final Thoughts.

This funding data shows a clear and unexpected trend around the time of US COVID onset: a decrease in rounds raised AND an increase in average round size. We can see that the data supports our hypothesis — that later-stage companies are raising rounds throughout COVID, while earlier-stage companies haven’t been able to.

However, this data also tells us that the VC space is resilient. Every single visual shows that even though VC activity took a hit in Q1, that decrease never continued into Q2. Most states showed plateaus, and some like New York and Massachusetts even show signs of an initial increase and recovery! While COVID has undoubtedly impacted the VC space, especially earlier-stage businesses, the worst is over. We’ll keep up with Q3 and Q4 2020 data as it comes out, but here at A-Level, we expect the VC space to self-correct in the next few months.