Venture Capital Activity and Market Contraction

A Quarterly Wink and a Glance at Venture Capital

Global geopolitical events, economic uncertainty, inflation, rising interest rates and continuing supply chain issues may finally be taking their toll on venture capital (“VC”) activity. Q2 2022 had $62 billion of completed deal value, which was the lowest recorded quarter since Q4 2020. The primary reason for the decline in deal value is that VCs are taking a much more cautious approach to larger deals. The start-up ecosystem has been strong thus far and not affected by corrections in later-stage deals or public market volatility. Dollars invested in larger deals have been on the decline, however, the number of deals completed has remained at a high level.

IPO Market Not Showing Much Promise

In 2021, VC-backed exits exceeded $777 billion dollars, and almost 86% of the exit activity was achieved through public listings, including SPACs. IPOs of VC-backed companies cratered in Q2, with only eight completed; this represented a 13-year quarterly low. For the first six months of 2022, VC-backed exits have only amounted to $49 billion, and only a small portion of that was through the IPO window. Through the first two quarters of 2022, the number of public listings stood at a mere 42. The IPO window has essentially only opened a “crack.” Many of the factors negatively impacting economic growth are also impacting the IPO/SPAC market.

VC Fundraising Continues to Be a Bright Spot

For the first six months of 2022, VCs have raised new funds totaling more $121 billion across 415 funds. Through the first six months of 2022, VC fundraising has already achieved 87% of the 2021 full-year total. This puts VC fundraising in an excellent position to exceed the record fundraising amount of $139 billion in 2021. Funds continue to raise large pools of capital. In fact, 30 funds have closed with at least $1 billion in commitments so far in 2022. Almost 67% of the capital raised in 2022 was for $1 billion-plus funds. VCs will certainly have much capital to invest in the next few years, which is a positive sign for the start-up ecosystem.

Slowdown in VC Activity Not Affecting Seed Deal Activity

The slowdown in VC activity in terms of deal sizes, valuations and number of completed deals does not seem to be affecting the seed stage. These very early-stage companies are just far removed from the volatility of the public markets. For the first six months of 2022, almost 3,000 angel and seed-stage deals were closed at a deal value of approximately $10 billion. Both deal count and deal value are on track to achieve records in 2022. Median seed valuations for the first two quarters of 2022 were $12 million, which was more than 30% higher than the $9 million median seed valuation achieved in 2021.

Slowdown in Mega Deals

The recent decline in the value of tech companies in the public markets has created much uncertainly around public and private company valuations. The valuation issue has certainly come up regarding mega deals. Even though Q2 2022 saw more than 100 mega deals close, it was the lowest number of quarterly mega deals closed in the last 18 months. Valuations of later-stage deals are also beginning to level off.  The average late-stage valuation for the first two quarters of 2022 was approximately $690 million, which showed little movement from 2021. This was the first quarter since Q1 of 2018 where there was not an increase in later-stage valuations.

Outlook

With record amounts of dry powder on the sidelines and near record levels of new fundraising activity, the entrepreneurial community should be optimistic about VC activity over the next couple of years. In many deal stages, valuations are plateauing and even declining, which is certainly not a surprise to those in the venture space. Last year was a record year in VC in terms of deal value, deal counts and funds raised. Based upon the first six months of this year, 2022 might not be a record year. But even taking into consideration some market tightening, it should still be solid year, nonetheless. Let’s keep our eye on Q3 and see how valuations fare and if the IPO market comes back to life.