Venture Capital Deals ‘Subdued’ as Investors Digest the Economic Downturn

Venture capital valuations are beginning to reflect the broader economic decline. 

According to PitchBook’s latest U.S. VC valuations report, expected to be released Thursday, median pre-money valuations for early-stage companies experienced their first quarterly decline in two-and-a-half years. Amid historic equity market declines, rising inflation, and geopolitical tensions, pre-money valuations for early-stage VC landed at $52 million in the second quarter, a 16.1 percent decline from the first three months of the year. 

“The companies that are coming to market now are getting matched against a little bit more critical or pessimistic expectations about the future, and that’s beginning to flow through into the deals that are getting done,” Cameron Stanfill, a senior analyst and venture team lead at PitchBook, told Institutional Investor. 

At the same time, deal sizes continued to increase, growing 19 percent from the first quarter’s median deal size. PitchBook attributed this trend to startup founders pushing to raise more capital amid uncertainty about the future of funding in the VC market and warnings from their GPs to “conserve runway.”

Early-stage deal count saw a slight decline in 2022, but hasn’t fallen off a cliff, Stanfill said. However, the deals that are closing are “subdued,” as investors approach them with caution. 

“There isn’t that over-exuberance that was used to characterize 2021 venture capital investing,” Stanfill said. 

This prudence is also evident in the changing tactics of non-traditional investors, which are defined by PitchBook as all investor types that aren’t dedicated VC firms. While non-traditional investor participation in the VC market has remained high throughout the first half of 2022, PitchBook noted these investors are taking a more careful approach than in 2021. From 2021 to 2022, deal size participation by nontraditional investors decreased by 13.3 percent, while valuations associated with the category dropped by 15 percent. 

Stanfill said this shift doesn’t mean non-traditional investors are pulling out of VC, like they did in the 2008 global financial crisis. Instead, he said it signals that these investors are responding to broader market volatility and uncertainty.

“They’re doing what every investor does in a moment of uncertainty, kind of reassessing strategy or taking stock of their own business,” Stanfill said.