VC report: Q1 starts slow for D.C. as coronavirus looms

Ahead of the major economic slowdown the world is currently experiencing due to the COVID-19 outbreak, the D.C. area startup ecosystem started to see downward trends in investment deal activity, according to PitchBook and the National Venture Capital Association’s quarterly “Venture Monitor” report.

The lull D.C. saw in the first quarter of 2020 likely isn't all due to the coronavirus pandemic, since deals completed during that time were probably in the works for several months. But the pandemic, which has forced many businesses to close or enact layoffs, doesn't bode well for deals.

By the end of 2020’s first quarter, the Washington metropolitan statistical area, which includes the District and parts of Maryland, Virginia and West Virginia, had seen 43 venture capital deals totaling about $239 million. That’s down from 63 deals the previous quarter totaling about $541 million. It’s the slowest quarter for number of deals in at least the past six years, and the slowest for total capital invested since Q4 2016, according to the report.

As dramatic as the numbers are for Q1 2020, they may not yet show the full effect COVID-19 might have on the startup and VC ecosystem, since deals take a long time to close.

“The topline numbers from the venture industry in Q1 2020 might not reflect a major disruption in the startup ecosystem, since the COVID-19 chaos came into full effect in March when venture deals were already in progress. However, the global pandemic is having a massive impact on startups and VC investors, just as with the rest of the US economy,” the report says.

The country as a whole also saw a decline in the number of deals, though not as drastic. The national number of deals in Q1 2020 was 2,298, compared with 2,800 from the previous quarter. Notably, the total capital invested in Q1 2020 is up more than $3 billion from the previous quarter, at $34.2 billion. It’s worth noting that late-stage ventures saw more of that uptick than companies in angel, seed and early stages. However, given the toll the coronavirus crisis has taken on the economy, the upward trend is not expected to continue.

“New deals are still happening, but most of these had already been in the pipeline prior to the onset of the pandemic. Investment pace will likely slow down if shelter-in-place orders are still in effect once deals that were already in progress or in the pipeline are completed, since VC is a business that revolves around in-person meetings with founding teams before making an investment,” the report says.

The top 10 deals in the D.C. MSA make up nearly three quarters of the total capital invested in the area, according to the report, for a sum of about $176 million. Comparatively, the top 10 deals in Q4 2019 totaled $334 million.

Here are the D.C. area’s top 10 deals from the most recent quarter:

The report does not list any exists for the D.C. area in Q1 2020. That tracks with a national lull in exits for the quarter. Venture-backed companies had 183 exits, down from 215 the previous quarter and continuing an overall decline. While that slowdown has largely been due to other factors in the ecosystem, the ongoing pandemic will likely reinforce it.

“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,” the report says.