Ratio of VC deals to exits reaches ‘unsustainable’ levels

On Oct 28, 2022

It has been a regrettable year for venture exits so far. To put the slowdown into perspective, the US VC industry secured around 15 funding deals for every exit as of Q3 2022, according to the latest edition of the PitchBook-NVCA Venture Monitor.

“The roughly 15-to-1 deal-to-exit ratio is unsustainable,” said Kyle Stanford, a senior analyst at PitchBook. “At around 50% higher than the figure from past years, we need to assume a higher failure rate for investments than we have seen in the past.”

While the IPO market has been nonexistent this year, acquisitions have always been a common exit route for VC-backed companies. But Stanford said that, while M&A activity has slowed too, the number of closed exits via acquisition in 2022 sits higher than any year prior to 2021. This shows that the jump in deal-to-exit ratio has much to do with the high number of rounds being completed in this market.

VC-backed companies collected nearly $195 billion as of Q3, marking the second-highest annual total for capital investment after 2021. On the exit front, only $63.4 billion in exit value was generated across an estimated 1,092 exit events.

The lack of liquidity via public markets is likely to add pressure on late-stage startups to return to equity markets for additional financing and to accept investment at lower valuations compared with previous rounds.

“There has been a huge amount of value created in recent years with the rise in valuations, but if that value isn’t able to be realized, then the venture market is likely to suffer,” said Stanford.