Q3 2020 Saw a Rebound in Early-Stage Venture Activity

In our last blog post giving a high-level perspective on our proprietary price-per-share tracking data, we hinted that we were beginning to see a turnaround in Q3 venture activity following a relatively dreadful Q2 induced by the pandemic. Now that the quarter is complete, we can be more concrete about what happened this past quarter.

Our Q3 data comes from seasoned investments into more than 3,000 active startups. The vast majority of these startups are early-stage, that is, they have not yet raised a Series B of financing. We believe that this is the largest timely source of price updates in early-stage venture capital, as other data sources typically have a lag for early deals.

Q3 had more markups and fewer markdowns than the previous quarter, the historically bad Q2. That’s the first time we tracked such a simultaneous improvement (i.e., with more markups and fewer markdowns) quarter-on-quarter in more than a year:

However, markups are still elevated by historical levels. One reason why is that it appears more startups are taking “soft markdowns”: raising money at a flat or slightly increasing headline valuation, and seeing their share price decrease (because of dilution) by less than 10%. This appears to be a new phenomenon starting with the pandemic:

We attribute it to some startups “paying for optionality”: raising money, even if it’s not on the best terms, in order to extend their runway to see out the pandemic. We would expect, and have observed, those startups whose core businesses have been sharply affected by the pandemic to take larger writedowns, and we have not seen a substantial increase in negative exits (wind-downs where investors lose money) since the start of the recession.