VC investment in the US remained buoyant in Q3’20, led by a $1.9 billion raise by SpaceX. The acceleration of digital trends given the ongoing pandemic helped spur VC investment, particularly in key areas such as health care, business services, and edtech. Renewed IPO activity, including Snowflake’s $3.4 billion IPO, also helped showcase the resilience of the US market.
Digital business models attracting significant VC investment
During Q3’20, digital business models were a top priority for investors, with both VC investors and corporates embracing solutions aligned with doing business successfully in the current environment, such as enhancing digital service channels for consumers, enhancing productivity within a highly remote workforce, or helping companies understand how consumer behaviors are changing. Fintech was a primary focus of US VC investors in Q3’20, with wealthtech Robinhood raising more than $1.2 billion over two deals, alternative payments model company Affirm raising $500 million, and digital bank Chime raising $435 million. During the quarter, data analytics firm Palantir Technologies also raised $549 million (followed by their IPO), while digital C2C marketplace OfferUp raised $453 million.
Valuations becoming more grounded as VC investors focus on profitability
When making funding decisions, US-based VC investors continued to emphasize profitability during Q3’20, including metrics such as unit economics and cost per dollar of revenue. This focus has had a grounding effect on valuations, making them more realistic and supportable.
The intense focus on profitability has put pressure on companies seeking funding to improve their financial discipline. This has led many startups to more rigorously examine their business and operating models. As a result, several companies have learned that they can be as effective with less resources or by using a remote workforce, allowing them to trim costs and speed up their path to profitability despite the challenging business environment.
Healthcare remains hot for VC investors in the US
Health and biotech remained a very robust area of interest for VC investors in the US. Interest extended well beyond pandemic response-related solutions, with primary care solution VillageMD raising $275 million and cancer screening company Freenome raising $270 million during Q3’20. As potential vaccines for COVID-19 move closer to approval, there has also been increasing recognition of the significant challenges associated with efficient vaccine production and distribution. This is beginning to drive an increase in interest in logistics solutions able to support rapid and efficient vaccine distribution.
Trends to watch for in the US
VC investment is expected to hold steady heading into Q4’20, although early-stage companies will likely continue to struggle for funding as investors remain focused on later stage deals. Investor interest in business productivity solutions, health and biotech, fintech, and edtech will likely remain very high.
The pipeline for IPO exits is expected to remain strong heading into Q4’20 due to pent up demand, particularly among unicorn companies. IPO activity could pause as the US presidential election approaches in November, before picking up again heading into Q1’21.
Given the challenges facing many businesses due to the protracted duration of COVID-19, there could be an increase in consolidation activity in the US, particularly in sectors more negatively affected. Acquisition activity could also increase as investors with deep pockets look for opportunities related to distressed companies.