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Venture Pulse Q1 2020: COVID-19 casts shadow over deal activity

Venture Pulse Q1 2020

VC outlook clouded amid coronavirus uncertainty

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Sunil Mistry

Audit Partner, Enterprise and TMT

KPMG Accountants B.V

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Venture pulse

The first quarter of 2020 was unlike any on record.

Despite the rise of the novel coronavirus, global VC investments held almost steady, down just 7 per cent from the fourth quarter. But, by mid-year, when we look back at the first-quarter activity, Q1 is likely to register as the calm before the storm.

In this quarter's edition of Venture Pulse, we examine a number of global and regional trends, including:

  • The implications of COVID-19 on each of the key jurisdictions
  • The rise in demand for digital business models
  • The rise in benevolent investments in companies focused on addressing COVID-19 challenges
  • The long-term ramifications of the COVID-19 pandemic on potential investment trends

In Canada, we started off on a high note, with Georgian Partners closing the country's first private venture capital fund to be valued over $1 billion. While this new fund affirms the underlying health of the Canadian market, deal activity and funding both fell sharply over the rest of the quarter as COVID-19 began to cast a shadow.

Venture capital investment in Canada fell by 51 per cent to US$702 million in the first quarter from US$1.17 billion in the fourth quarter. The number of closed deals declined 40 per cent.

With unprecedented shutdowns around the world, the second quarter for VC investment isn't expected to be much better either. Even so, there's a tremendous amount of dry powder in the global VC market that's waiting to be put to work once investors have more clarity about how long and deep the recession will be.

Canada's venture capital ecosystem is mature and robust enough to withstand the downdraft, and many Canadian VC and private equity investors are working remotely to keep deals moving forward with virtual meetings, calls, and presentations.

In this new normal, we expect VC and PE investors will be less tolerant of start-ups that burn cash and instead scrutinize plans as to how and when they'll become cash flow positive. They want to invest in companies with strong value propositions.

And, right now, that means we will see more follow-on funding to companies already in existing VC portfolios and funding to companies in telemedicine, telehealth, artificial intelligence, life sciences, biotechs, and startups focused on solving real problems with digital solutions.

During the quarter, we saw the Canada Pension Plan Investment Board invest $20 million in a Hamilton, Ontario-based biopharmaceutical firm, while the Fonds de solidarité FTQ, which invests $100 million a year in Canadian biotech startups and venture funds, persuaded a European investment fund to pour seed capital into 15 to 20 Quebec companies created at Quebec universities.

As we all wait out this pandemic by doing our utmost to support our frontline health care workers, let's use this time to consider the kind of economy we want when the pause button is lifted. We can't really go back to normal right away once the curve's been flattened, and there can be no doubt that the coronavirus will have a more fundamental societal impact on work, education, medicine, supply chains, payments, and more.

Crises have a way of bringing out the best in Canadians. The entrepreneurial spirit is flourishing, and we're seeing incredible collaboration between the public and private sectors to ensure medical supplies reach and money moves to the people who need it the most right now.

At the same time, this crisis is also exposing many inefficiencies that stitch our economy together, underscoring the importance of digital technology and solutions. Already, as the pandemic unfolds, lessons are being learned. Once we're through the worst, it will be important to identify and review areas for improvement. "There's a way to do it better – find it", the legendary inventor Thomas A. Edison used to say to challenge his staff.

What better time than now to harness that ingenuity?

© 2020 KPMG LLP, an Ontario limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

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