- This year, VC-backed startups could see the lowest number of exits since 2011, according to Pitchbook.
- As the number of IPOs and acquisitions decline, startups might start pursuing alternative exits, such as acquisitions by blank-check companies.
- The VC ecosystem depends on company exits to reward investors and provide liquidity for employees with stock options. With fewer companies filing to go public or successfully seeking out acquisitions, the pool of capital could start to dry up.
- With less capital to go around, unprofitable, growth-driven startups will continue to make tough decisions about slashing costs in order to extend their runways.
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It’s safe to say that 2020 has been a mixed bag for startups.
But data from Pitchbook about venture capital activity in 2020 Q2 tells a rather gloomy story.
In the first half of 2020, VC-backed startup exits have reaped a total value of 45.3 billion, which is less than one fifth of the $261.6 billion that venture-backed companies racked up from their exits for all of 2019. If exits continue at the same pace this year, they will fall far below the 2019 total.
Just 147 startups pulled off an exit in 2020 Q2, at a total value of $21.2 billion, according to Pitchbook.
This total pales in comparison to 2019’s Q2, which was the best quarter ever for VC-backed startup exits: 383 startups exited for a record total value of $138.3 billion, per Pitchbook.
It’s hard to compare 2019, which saw a number of high profile startups like Uber, Pinterest, Slack, and Zoom go public at sky-high valuations, to 2020, which so far has seen VC-backed startups lay off thousands of employees, and hot startups like Airbnb slow down their IPO plans.
If exits don’t start to pick up soon, Pitchbook projects that 2020 will be the year with the fewest VC-backed startup exits since 2011, when 742 startups exited at a total value of $67.3 billion. However, 2020 doesn’t seem headed for the same low points touched in 2008 to 2010, in the aftermath of the financial crisis, according to Pitchbook. And the firm said an uptick in IPO filings at the end of the first half of 2020 might be a positive sign.
With fewer exits on the books, some VC firms might find themselves strapped for cash. However, fundraising has remained robust for larger funds, per Pitchbook.
The economic situation in the United States remains precarious in 2020. As coronavirus cases and deaths continue to surge across the United States, there is a good chance that many schools will remain closed, which could seriously hinder startup workers and founders with children. Without open schools, many other US workers will have to stay home, with ripple effects on employers and the economy. And if a second wave of coronavirus strikes the US, stocks could plunge 20-30%, as Business Insider’s Ben Wink has previously reported.
Startups are responding to the unprecedented economic conditions in a number of different ways.
Some companies have taken advantage of the brewing coronavirus recession by buying up smaller startups at rock-bottom prices. Financial technology startup Brex, for example, acquired three startups in March 2020, just before raising $150 million at a $3 billion valuation and laying off 17% of its staff in May.
The coronavirus pandemic could also accelerate a movement of startups seeking to exit by selling to shell companies known as SPACs, which are sometimes called blank-check companies. Hims, the hair loss treatment startup that has received funding from Peter Thiel’s Founder Fund as well as from Redpoint Ventures and SV Angel, is reportedly negotiating a deal with a SPAC, per Reuters.
SPACs, which usually perform better during market downturns, make it possible for startups to bypass the administrative headache of going public while also getting liquidity in the hands of the startup’s early investors and early employees.
The VC ecosystem depends on exits to achieve liquidity, and with fewer companies filing to go public or successfully seeking out acquisitions, the pool of available capital could start to dry up if the economic decline becomes extended. Venture capital firms need to demonstrate that they can provide a good rate of return for their limited partners, who are the investors in VC funds.
Some VCs have encouraged their portfolio companies to extend their runway, which is how much cash a startup has in the bank to fund its operations, for up to 3 years. It seems likely that startups will continue to do this by slashing headcount, slowing down growth, and reducing other overhead costs, like sky-high rents.
If the gloomy forecast for 2020 startup exits comes true, then VCs, who have poured billions into unprofitable startups like Uber and Airbnb in their pursuit of growth, may have to switch gears and focus on profitability.
And if unprofitable startups start to run out of runway and fail to raise additional funds, they might become some of the first causalities of the worst recession in the US since the 1930s Great Depression, which lasted a decade.
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