Covid-19 and the Trajectory of US Venture Capital and Technology Innovation

By Jeff Berkowitz

As the United States enters month nine of the “new normal,” every corner of the economy from emerging technologies to academia and even athletics has been touched by Covid-19. While the prevailing assumption in March was that the global economic stagnation triggered by the pandemic would especially hurt the startup economy, this prediction has been upended by up-and-coming technology companies throughout the venture capital (VC) world. Similar to the startup renaissance that harnessed the dramatic economic downturn of 2008, this year has seen a resurgence of venture capital investment in health tech, digital transformation technology, and AI companies, with the goal of guiding 2020’s versions of Airbnb and Uber up from the ashes.
In the spirit of adapting to the global economic and workplace realignment triggered by Covid-19, areas of significant venture capital investment have included e-commerce, artificial intelligence, education technology, health technology, cloud migration and blockchain. The most dramatic shift has understandably been in health tech, which has helped spur innovation in an industry that has traditionally been a slow adopter of digital transformation strategies. Both the pharmaceutical and healthcare industries have traditionally taken conservative approaches to the implementation of cutting-edge IT and data systems, but are now clamoring for the cloud-based transformation, data analysis and care provision technologies that are skyrocketing up the VC food chain. With these trends in mind, the most notable market shifts this year included a 19% increase in healthcare innovation related funding in the first half of 2020 compared to 2019, a 35% increase in AI funding during that same time period, and cryptocurrency (blockchain) deals were up over 120% in H1 of 2020 compared to all of 2019. That said, the hottest category for investment has without question been the convergent Healthcare AI industry, which raised an industry record $2.1 billion in the third quarter of 2020, and has now raised more money through the first three quarters of 2020 than any full four quarter year. Although some market analysts caution that these surges in funding were already taking place pre-Covid-19, these industries have more than weathered the recent economic storm.
As the aforementioned sectors have ascended the VC priority ladder in 2020, previously cachet technologies have lagged. For example, fin-tech deals declined 30% in Q2 compared to Q1, autonomous vehicle investment has reflected an anticipated 3% decline in the autonomous car market from 2019 to 2020, and solar technology investment declined 74% in the first half of 2020. With fin-tech starved by a dramatic decline in transaction-based revenues, and the other two sectors being considered superfluous to the needs of a Covid-19 economy, these previously bullish technologies have stalled. While it is certainly possible these areas will recover in due time, especially fin-tech, this stagnation has continued throughout 2020, and there is no widely agreed upon forecast for recovery.
On aggregate, the total number of VC rounds in 2020 through the second quarter (March-June) in the United States was down 44% compared to the same time period in 2019. However, the general decline in rounds of funding this spring was not matched by a decrease in overall allocated funding. Indeed, during this same period of time, collective funding for American startup ventures totaled $26.9 billion, down only 1% from the prior quarter. Furthermore, the second quarter of 2020 was home to a record number of mega rounds ($100 million +) and was highlighted by sizeable funding rounds for pandemic friendly companies such as DoorDash and Instacart. How is it possible that aggregate domestic VC funding has barely changed during the pandemic, while the number of rounds has simultaneously declined so dramatically?
This balance has emerged as a product of VCs being keenly interested in either early stage technology firms with direct connection to the Covid-19 pandemic, or late stage lower risk firms. As such, there has been a notable decrease in seed funding across the board in any industry not explicitly connected to the needs of a pandemic economy, and a notable increase in massive late-stage expenditure on lower risk, more developed companies. The most significant investments ($700 million +) in the second quarter of 2020 in the US funneled to companies like Stripe, Sana Biotechnologies, and Palantir Technologies, all well-established, Covid-19 relevant, low-risk firms. It remains to be seen how long this trend will continue, but there is little doubt that for the foreseeable future there will be an unprecedented need for cloud tech, health tech and AI as the US hopes to move forward into a post pandemic economy.
Jeff Berkowitz is a research intern with the Strategic Technologies Program at the Center for Strategic and International Studies in Washington, DC.
The Technology Policy Blog is produced by the Strategic Technologies Program at the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).