2019 had seen more than half a dozen IPOs in B2B SaaS such as Medallia, Cloudflare, Dynatrace, Slack, Fastly, Zoom and Pagerduty. And while the markets ended on an historically all time high, the stock price of most of these companies had performed far worse than any index by year end. The outlook for 2020 was cloudy.
Credit: BVP Nasdaq Emerging Cloud Index
It all turned out completely different, and 2020 ended on yet another all time high: The Dow Jones ended up 10.6% (from 28868.8 to 30606.5), the Nasdaq up 41.8% (from 9092 to 12,888), and the BP/Nasdaq Emerging Cloud Index EMCLOUD more than doubled at 105.5% (from 1231.6 to 2530.88).
The Coronavirus struck and on March 12 the financial markets had the worst drop since 1987. IPOs seemed to be off for the rest of the year. There was talk of down rounds, ratchets and other potions from the poison cabinet of venture deal terms.
Yet the markets also quickly adjusted to where things were headed: Zoom became worth more than Uber on March 19. And Zoom wasn’t the only beneficiary. Services like Peloton and Doordash saw massive increases in usage and customers.
Record new levels were reached in late July, and with it talk of IPOs came back. And it wasn’t only IPOs: The direct listings pioneered by Spotify and Slack saw wider use and a previously scarcely known financing vehicle called SPAC suddenly became the next new thing. Going public again was an option for high growth SaaS companies and by the end of September unicorn SaaS companies such as Asana, Snowflake, Unity, JFrog and Palantir were publicly traded entities. On the flipside, multiples of slower growth SaaS companies suffered. As the year came to an end it was off to the races as retail investors piled into the most attractive stocks and the forward revenue multiples seemed like an anachronistic benchmark.
The US unicorn population continued to increase and the total value of these unicorns hit record highs. Venture growth investments reached an all time high in 2020 and later stage deal sizes surged. Simple math showed that providing private growth funding to private unicorns was attractive at even elevated valuation levels.
The picture was quite different at the early venture stages.Seed stage deals declined in terms of US$ and number of deals. Taking the Band of Angels as a proxy for pre-seed and seed investing, the number of investments in 2020 decreased by a third. Seed stage deal sizes remained fairly constant at a median seed stage deal of $3 million compared to $0.8 million at the end of 2014. These large seed stage deals have led to a proliferation of seed funds and the emergence of pre-seed funds. According to Pitchbook, there were 1,162 venture funds focused on Seed in 2019 and only 126 focused on Pre-seed.
Will the success of the 2020 exits trickle down to pre-seed investing in 2021?
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