A report released this weekend in the United States indicates the level of damage to the investment market in start-up companies. According to Crunch Base, not only has there been a sharp drop in investment but also exits in the last half of the United States. For example, in the second quarter of 2020, 177 acquisitions were recorded, which amounted to approximately $ 9.7 billion, compared with 278 exits, which in the second quarter of 2019 amounted to approximately $ 21.7 billion. A large portion of the exits were from acquisitions made by Amazon and other giant companies for billions of dollars.
The bright spot in the first half of the year was a number of issues in the US capital market, which surprised and achieved very successful results. Some even have an Israeli connection: Zoom Info, which started out as an Israeli company, raised $ 935 million, and the company that bought used vehicles and Rum, whose founders were Israelis, raised $ 468 million and others.
When comparing the data for the corresponding period in 2019, one sees the intensity of the decline in investments. In 2019 companies raised $ 70 billion in the first half of the year and in 2020 only $ 64 billion was raised. Similar data also emerges from a report by the accounting firm PWC which also found a slight decline over the years.
In the second quarter of 2020, companies raised $ 29.8 billion, compared to $ 36.5 billion in the same quarter in 2019 and $ 33.7 billion in the first quarter of 2020. Significantly from the first. “I believe the decline will continue throughout the year,” he told Calcalist.
The sharpest decline was in early-stage investments when lime investors and angels invested $ 1.1 billion in 699 companies compared to $ 1.7 billion in 1,773 deals in the same quarter in 2019. Investments in the early stages, ie the first round of investments A, also often experienced a decrease, especially in the number of companies they raised. In the second quarter of 2020, 555 companies raised $ 11.1 billion compared to $ 12.6 billion raised by 887 companies in the second quarter of 2019. “Crisis times are usually a great time to invest in early-stage companies,” says Dinti. “But I believe a lot of investors are still apprehensive.”
According to Adam Fischer, a partner in the American investment fund Bessemer, in March and early April it was impossible to work. “People cared about health and the family. Some of the things that closed in March were the result of activity in the months before. Many entrepreneurs waiting to raise prefer to take investment from existing investors. Not only investors took a step back, but many entrepreneurs did. I believe the third quarter saw a decline of at least 10. % “.
According to Fisher, we still do not see the results of the corona. “In the third quarter the Corona is really determined and there will be a much more significant decline. The numbers of the second quarter show a severe damage to lime, which will continue to be damaged in the future, mainly because it is impossible to meet people and therefore both sides give up recruitment.”
There has been a decline in recruits in the later rounds that often form the anchor of recruits in times of crisis. In the second quarter of 2020, capital raising of $ 15.9 billion was recorded in 191 companies, compared with 306 companies that raised $ 20.7 billion in the corresponding quarter. There was also a decrease in the second quarter in the number of companies that raised rounds of less than $ 100 million with $ 14.2 billion raised compared to 20.7 in the corresponding quarter.
A significant portion of these fundraisers were a number of huge fundraisers including Google’s autonomous vehicle company Waymo which raised $ 750 million, Airbnb which raised $ 1 billion and the fintech company Stripe which raised $ 600 million.
“Less investment rounds in small amounts”
Is the decline in investment in US start-up companies a sign of things to come? The answer is yes. The first signs of this were seen in the IVC ZAG report. According to Boaz Dinti, a partner in the Kumara Investment Fund, the decline between the last two quarters was the first problematic sign in Israel. “The first quarter has traditionally been weaker than others while this year the second quarter saw a slight decline compared to the first quarter.” In the first quarter, companies in Israel raised 2.7 billion, compared with 2.5 billion in the second quarter, which is still a very high amount over the corresponding quarter in 2019.
“Although a lot of money flows into investing in later stages, I fear that early stage companies will run into a problem in the coming quarters. In the early stages, they got off the ground, “says Dinti.
Irish Kahn, a partner in the DTCP investment fund, believes the US came to the corona crisis late, and it was only in the second quarter that companies there began to feel it. “The portfolio of American funds is much larger and much more global so they had to make bigger changes and halt investments Of companies, “she said.” In Israel, many companies realized that they could encounter recruitment difficulties in the United States, so they wanted to recruit as many as they could for the near future. ”
Both Irit Kahn and Dinti believe that companies and investors will now look for investments that are long-term without dealing with additional funding in a difficult period. “When I look at the market today I see far fewer investment rounds of more than $ 100 million and more rounds of tens of millions of dollars. Today, when we look at an investment we want to see that the company we are investing in understands the challenge of the coming year. “Installation in the client’s offices can be problematic. Beyond that, we will look for companies for which the investment will be sufficient at least until 2022 and they will not have to raise additional funding in 2021,” says Dinti.
According to him, today a lot of companies are pouring money into investments in the later stages, where the chance seems to investors to be significantly lower compared to a start-up that is still in the early stages. “I believe that today there are investors who will take advantage of opportunities to enter companies that in the past had difficulty investing in them and are now open to investment.”
“A lot of American funds felt the corona only in the second quarter,” Kahn says. “I think there is still a lot of money in the market and funds have very deep pockets so there will be no difficult problem for companies. There will be companies that will not survive the period because there will be no demand for their products, but in terms of recruitment I do not think there will be a big problem.”
She says there will be many more companies that emerge victorious from the crisis. “There is no reason to go into a deep depression. There will only be a large screening of companies and a choice of investments. The continuum of investment increases significantly and many companies that received money in the past will find it more difficult. There is a trend of more money at least companies. “It’s shrinking the number of companies, but there’s an opportunity here to set up companies in areas from the new world of the Corona and it’s producing a new wave of companies,” she said.