Trends in VC Point to Opportunities in the Midwest

Before the coronavirus and subsequent economic downturn, the venture capital industry was continuing its relentless evolution. For instance, competition has become more intense in recent years, and the emergence of mega-funds (e.g. funds with at least $1 billion) have started to alter the VC ecosystem. Plus, we are seeing more of a balance between financial performance and end-game strategic impact.

Following are some trends we are experiencing, some of which have been shaped by the economic downturn.

Venture Capital Industry is Seeing Fewer Seed Deals

While we’ve seen a shift from deal sourcing to managing existing portfolios during COVID-19, the number of seed deals in the United States has been steadily declining since 2015. Reasons include fewer fundable startups than there were five years ago, and many VC and CVC (corporate venture capital) funds have shifted their focus to more mature investments. However, despite the decline in the number of deals, median seed deal value has reached new highs in the last couple years.

Startups are Raising Larger Rounds and Staying Private Longer

One explanation for why we’re seeing fewer, but larger, early-stage rounds has to do with the startups themselves. Today’s startups have access to more financial and strategic resources (like incubators, accelerators and crowdfunding) than their older counterparts, delaying the need for early stage VC funding.

As a result, the VC industry is seeing more mature startups with higher valuations (and deal size) at each fundraising stage than it has in the past. For instance, the median age of angel- and seed-stage companies jumped from 1.9 years in 2014 to 3 years by the end of 2019.

In addition, startups are staying private longer, allowing them to scale without facing rigid regulations and the high costs associated with public markets. Plus, they’re able to foster relationships with (and reap benefits from) strategically focused private investors for longer periods of time. For VC and CVC funds, this could mean additional opportunities to access innovation, perhaps through extra funding rounds during peak growth years.

CVCs Continue Strong Investment Activity, But Growth is Slowing

According to Pitchbook’s and the National Venture Capital Association’s 2019 Q4 venture monitor, deals with corporate venture capital (CVC) participation made up close to 25 percent of all venture deals in the United States over the past four years. On a global level, CVC-backed funding and CVC-backed deals saw record highs in 2019; however, growth from the previous year was minimal.

The COVID-19 pandemic is likely to stunt growth even further, at least in the short-term. For instance, global CVC-backed funding fell 13 percent from Q4 2019 to Q1 2020 while CVC-backed deals fell 19 percent. What may make this economic downturn different from others is that the CVC industry is significantly larger and as sophisticated as purely financial venture capitalists.

Internet, Healthcare, Digital Health and Software Industries are Seeing the Most Investment

Our current crisis has impacted the types of industries seeing the most VC investment in the United States. For instance, Internet- and healthcare-related companies received the most investment in Q1 2020, which is consistent with our current stay-at-home lifestyle and the need for medical advancement.

Software, on the other hand, has been a dominant force in VC for quite some time, and healthtech reached new heights in 2018 and 2019. Cybersecurity and Pharma & Biotech are some other sectors you should be watching, having seen substantial increases in investments in the past couple of years.

VC Interest in Female- and Minority-founded Companies is Growing, But Very Slowly

Venture capital funding for female-founded or co-founded companies in the United States has been increasing in recent years, nearly doubling over the past decade and reaching a record $19.4 billion in 2019.

Despite the modest growth, companies founded by female entrepreneurs make up a small percentage of VC deal count and struggle to raise as much as their male-founded counterparts. This is may be because VC is still primarily a male-dominated industry, with less than 10 percent of decision-makers at venture capital firms in the United States being women.

Entrepreneurs of color also are underfunded in the venture capital industry. A recent diversity report reveals that just one percent of venture-backed founders were Black and less than 2 percent were Latinx, despite making up more than 20 percent of entrepreneurs in the United States.

However, recent efforts have been put forth to help close diversity gaps within the industry. For instance, the National Venture Capital Association launched a new nonprofit organization that will focus on advancing diversity, inclusion and access to opportunities in the venture and startup worlds.

Similarly, Loud Capital, an Ohio-based VC firm focused on investments in minority companies, launched a $10 million pride fund designed to support LGBTQ-founded companies.

VC Opportunities Will Grow in the Great Lakes Region

While states like California, New York and Massachusetts continue to lead the nation in venture investments, the Great Lakes region saw dramatic growth in 2019. Iowa, Ohio and Minnesota were among the states that saw the highest year-over-year increases in VC assets under management (AUM), and Wisconsin, Illinois and Michigan all have AUM in the billions of dollars.

Furthermore, the Great Lakes region contains an abundance of global corporations and research universities involved in technological innovation across biological, informational and life sciences, making it an area to watch for VC and CVC opportunities.