If we look at Q4 2022 alone, only $11.7BN (7.2% of the yearly total) was raised. As often is the case in the private markets, the slowdown of capital flowing into venture lagged behind the dip in the public markets. As the latest Pitchbook-NVCA Venture Monitor reported, the headline number of $163B, 6% over 2021, made 2022 the best year in terms of total capital raised by venture funds, even with all the volatility, uncertainty, and general slowdown.ĭigging in a little deeper presents an alternative perspective. At first glance, 2022 looks like a continuation of that trend. The axiom of “only the top decile of VC firms perform well” was replaced by strong performance across the asset class, driven in part by the steady upward march of valuations due to near-zero interest rates. Over the past decade, one of the key factors driving LPs to invest in venture has been its relatively attractive yields compared to more traditional asset classes. While specific timelines vary, generally, startup runways (even with near-universal runway-extending layoffs) are shorter than VC investment windows, so we expect many more down rounds to happen as the year progresses. The longer this drags on, the more likely these two groups will come to the table and get deals done. VCs have finite investment windows in which they are expected to deploy their capital, and startup founders have finite runways where they will either need to raise more capital, get profitable, get acquired, or shut down. This standoff can’t last forever, though. In turn, founders are holding out to try and avoid taking capital in a down round, which can be particularly painful for existing shareholders. VCs, looking at public market comps and wary of looking profligate to their LPs, refuse to give founders the valuations they are looking for. Our conversations with VCs and startup founders suggest that the core issue is that the two sides just can’t agree on terms. Investors spent $100 billion, or 29% more in 2022 than they did in 2020.”ĭespite all the headwinds, Q3 2022 finished with VCs sitting on $586B in dry powder, a new record. Plus, despite the unprecedented contraction, 2022 was still the second-best year for startup funding in the last decade. For a whole host of reasons-pent-up pandemic demand, low interest rates, a historic public tech bull market-2021 might have been a funding outlier. Meanwhile, public exits of VC-backed companies fell to just 14 public listings in Q4 2022, demonstrating how drastically even public market investor appetite for venture has been affected.īut perhaps all of this is slowing just a return to some kind of “normal,” no matter how sharp a decline it may seem.Īs Crunchbase reported, “This decline can be read as a simple correction following an irrationally exuberant year. While many traditional venture investors seem to welcome this thinning of the LP playing field, it’s an indication that there will be less overall capital flowing into the venture space for the foreseeable future. Within the venture community, we have observed several traditional venture participants comment that the “tourists” have left the space. There was ust $24.1 billion in deal value involving nontraditional investors in Q4 2022-the lowest quarterly value in three years. In 2022, the Federal Reserve raised interest rates an unprecedented seven times.Ģ022 was also the first time there has been a year-over-year decrease in nontraditional investors being active in the venture space, further contributing to a decline in startup valuations as non-traditional investors have often been the high-bidder in startup fundraising. Increasing interest rates also make it harder and more expensive for companies to obtain debt capital, reducing non-equity financing options for companies that would have sought relatively cheaper venture debt in previous years. This means a company’s future value is worth less than it is now, lowering the valuation at which an investor can enter to meet their return expectations. This has been one of the dominant storylines of the last decade.Īs interest rates increase, however, so does the discount rate used to model future value. LPs pumping money into an ecosystem with a finite number of founders naturally drives up valuations. It’s no secret that in a low interest rate environment, venture capital and private equity are magnets for investors seeking yield.
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