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Law360 (April 24, 2020, 3:39 PM EDT) -- The number of venture capital financings in Silicon Valley plummeted by roughly two-thirds from January to March as COVID-19 took its toll on the startup ecosystem, a report from Fenwick & West LLP has found.
While 2020 started out with a boom, the number and size of Silicon Valley's venture capital financings has fallen sharply over the course of the year and startup share value is growing more slowly, the Venture Capital Survey found. The survey, published Tuesday, includes financings handled by a range of firms and examines companies headquartered in Silicon Valley.
The firm counted 126 venture financings in January, which is the most in a single month in at least five years and roughly double January 2019's levels, according to the report. By March, the number of financings had slipped to about 44, the report found.
News of a few more financings completed during that time could still trickle out, said Mark Leahy, co-chair of Fenwick's startup and venture capital practice and one of the study's co-authors. But the number is well below last year's levels, which hovered around 60 for each of the first three months of 2019, he said.
"The number of deals in January jumps out, since they were about double the month before and after," Leahy said. "But it also stands out that March was down in the number of deals."
The findings are largely in line with reports from other researchers, although there are some nuances within the overall trends.
Some industries have been hit hard, but private companies focused on life sciences and technology are still proving attractive, according to a first-quarter venture capital report published last week by CB Insights and PwC.
The CB Insights report found that biotechnology companies inked the most deals, with a range of software companies in areas like cybersecurity, analytics, fintech and health rounding out the top ranks.
"It's a tale of two industries," Leahy said.
And the first quarter did see its fair share of mega-rounds, which boosted fundraising totals for the quarter, the CB Insights report said.
But startup valuations are generally climbing more slowly than they were before, according to the Fenwick report. And some founders have wondered about their ability to attract new investors in the current climate, noting that "it may be difficult to go get money from a new investor [and they] may need to rely more on current investors to fund the company," Leahy said.
To encourage further investment, some startups could turn to financing terms that are more favorable to investors, such as pay-to-play provisions and senior liquidation preferences, which would ensure recent investors are first in line for a payout if the company is sold or goes under, Leahy said.
Fenwick's report didn't spot a widespread shift in financing terms in 2020's first three months, but such a shift could crop up as the market uncertainties drag on, Leahy said.
"We did not see a big change in those terms … but we're keeping an eye out," Leahy said.
How long the volatility lasts will likely also have an effect on the pipeline for initial public offerings. EY published a report in late March that suggested IPO activity could pick up in the fall, and Jackie Kelley, the firm's IPOs leader for the Americas, told Law360 she still thinks that's a possibility.
"The next IPO window would likely be after the Q2 2020 earnings, in late July and first half of August," Kelley said. "Some companies will be prepared to move quickly as soon as the window opens."
Companies are also weighing alternatives to going public, Kelley said. "Private companies continue to evaluate all financing options, including government funding, [mergers and acquisitions], and special purpose acquisition corporations (SPACs) as an alternative to a traditional IPO."
It's impossible to know when markets will steady, but when they do, investors may welcome a return to normal.
"When current market volatility and risk aversion driven by COVID-19 dissipates, investors will refocus on the market fundamentals," Kelley said.
--Additional reporting by Tom Zanki. Editing by Jack Karp.
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