North Texas VC activity slows in Q1 as coronavirus threatens recession

With the global outbreak of the coronavirus currently affecting the U.S. particularly hard, economic outlooks into the future remain uncertain based on the duration of its impact. And for North Texas, the effects of the virus’ financial impact may have begun to take root in the first quarter of the year

For the Metroplex, the previous quarter represented a slowdown in venture capital deals compared to both Q1 and Q4 for last year.

In Q1, startups in the DFW region raised a total of $147.8 million across 40 deals, according to the Venture Monitor Report by the National Venture Capital Association (NVCA) and PitchBook. In Q4 of last year, startups in the area saw a a lower number of $146.8 million over 48 deals. Q1 of this year is a decline from the nearly $168.5 million across 46 deals in the first quarter of 2019.

While the numbers are down from 2019, that was a particularly strong year for North Texas. The 2020 Q1 numbers are higher than the numbers for Q1 of 2018, which saw nearly $155.34 million across 29 deals. Overall, the quarter tracked similar to or slightly higher than previous Q1s since the Venture Monitor started tracking the data in 2014.

As with many things, Q2 is likely to be drastically different.

“After 2019 posted another strong year for the US startup ecosystem, it was hard to imagine the industry would be facing a new period of transition as a result of a global pandemic within just three months of the new year,” the report states. “The likely prospect of a serious recession looming (if it has not already begun) has critically affected the health of the startup ecosystem. The IPO market has rapidly fizzled out, and it’s possible that the M&A market could see hits as well, as large potential acquirers are also cutting costs.”

Currently, valuations have not changed much, though they are likely to shift as they are challenged in the coming quarters, the report notes. After reaching record highs in 2019, late-stage deals are expected to be the most effected, as they will likely be valued based on publicly traded counterparts. On the other hand, early-stage funding, which has also been at record levels nationally, is likely to see less volatility, as the deals tend to be more range-bound. However, authors of the report note that deal terms are likely to shift in favor of investors, cutting into startups valuations.

“All companies are looking to extend their cash runway, examining their burn rates and cutting costs during this period of deep uncertainty,” the report states. “Venture investors… have not stopped investing, but many are being more conservative in their approach. The focus has primarily turned to their existing portfolio companies, ensuring companies have enough cash runway and stressing efficiency.”

However, the NVCA and PitchBook said they see a bit of light on the horizon. The report says startups in the health care, biotech and others working to meet the demands of the new normal are likely set to see increased interest. Although, it notes that startups in lifestyle medicines are likely to attract less attention. The report also notes that VCs still have cash to deploy and it is typically in down times, when “battle-hardened” and capital efficient startups succeed that startup investing thrives.

“As a result, there is ample dry powder in the market ready to be put to work in promising startups,” the report states.

And here are the top 10 Q1 funding deals in the Metroplex: