As COVID-19 caused lockdowns in the Valley, followed by opening back up and then quickly back down again, the funding of Silicon Valley startups has slowed significantly.
2020 was initially poised to be a banner year for startups across the U.S. According to law firm Fenwick & West LLP, the average funding round in January 2020 of 126 Silicon Valley startups of this year saw valuations increase by 117%. In March of this year, only 44 startups received funding rounds, and the valuation increase was only 46%.
As a result, Silicon Valley entrepreneurs will need to expand their runway to anywhere from 18-22 months vs. the traditional 12 months. Read on for other salient trends for Silicon Valley we see for 2020.
V.C.s focused on servicing existing portfolios
Many venture capital firms are sitting on weighty portfolios and grappling with the economic slowdown from COVID-19. The 44 startups funded in March 2020 were primarily later-stage startups, emphasizing the protection of significant investments. Startups will need to look to earn bridge rounds when a full funding round may be out of reach.
V.C.s less risk-averse, spreading investments across many small teams
The two typical V.C. models are Value Investing (making big bets on a small group of startups and investing heavily) and the more diversified “Spray and Pray” (making smaller investments across more startups). Over the past few years, more V.C.s have been trending towards the latter, and 2020 is no exception.
It’s cheaper and more accessible than ever to start a new company, and the market is inundated with startups. As a result, it’s far riskier to make big bets in a market where startups are more likely to fail than succeed. The downside here, however, is that the V.C. firm’s attention is extremely divided, and startups in this environment need to fight to be seen and heard.
Angel investors are driving up valuations
The U.S. is the leading market for angel investors, and it’s estimated that in 2020 there are over 250k active angel investors in the States. This density can come with drawbacks for startups; however, whose valuation is driven up by their angel investors as many angels won’t move past one or two rounds of funding. When that startup is moved to V.C.s or other angel groups, the inflated valuation can lead to investor dilution and lower ultimate returns.
The prevalence of RegTech
Private equity funds have been under increased scrutiny across the U.S. during the COVID-19 era, and incidences of financial fraud are rampant. In the spirit of this new age of transparency and regulation, many prominent startups such as Hummingbird and Trunomi are working on A.I. regulatory solutions for the finance industry (RegTech). These companies focus on regulatory reporting, risk management, identity management & control, compliance, and transaction monitoring.
A.I. more in-demand than ever
Lastly, it should be no surprise that A.I. startups are still making waves this year. A.I. solutions such as self-driving cars and automated delivery solutions are projected to change the paradigm of our society completely. Startups that achieved significant rounds of funding in 2019 and continue to generate buzz this year include:
Nuro
Raised $940 million in a Series B Round in 2019
Major Backer: SoftBank
Industry: Robotics and automated delivery robots
Aurora Innovation
Raised $600 million over two series B Rounds in 2019
Major Backers: Sequoia Capital and Hyundai
Industry: Self-driving car software and hardware
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