NVCA: US venture capital investment slowed more in Q2 as economic fears mounted

The value of US venture capital deals fell significantly in the second quarter of 2022 as economic fears mounted and Russia attacked Ukraine.

The PitchBook-NVCA Venture Monitor First Look (preliminary data) showed a slowdown in the second quarter in the US market, the largest in the world. The outrageous deals that became a feature of 2021 are a distant memory as investors approach the biggest deals in the market more cautiously.

While the VC industry may not suffer as much as public market investors, the crypto speculators, or everyday people affected by inflation and the pandemic, if the VC industry is slowing down, it is a concern as startups are such an engine of job growth has been for the US

Q2 2022 was the first quarter since Q4 2020 to record less than $77 billion in deal value completed, with just over $62 billion closed. To put the slowdown in perspective, the deal value in the second quarter of 2022 was the highest of any quarter before the fourth quarter of 2020.

The number of deals decreased by 10% from the first quarter to the second quarter. But the deal’s value fell from $94.4 billion in Q4 2021 and $82 billion in Q1 2022 to $52.3 billion in Q2. Median valuations have remained fairly stable, but the peaks of inflated valuations have disappeared, said Kyle Stanford, senior analyst at Pitchbook, in an interview with VentureBeat.

“Right now we are seeing pretty strong prices in the market. The number of deals fell, but it’s not too bad, and it’s still one of the all-time highest quarters,” Stanford said. “However, deal value is down quite a bit from last year. That was reasonably expected as it is the first quarter since Q4 2020 where less than $77 billion was invested.”

Cryptocurrency investments in particular suffered from this. Cryptocurrency and blockchain VC deal activity on a global basis declined from 656 deals worth $9.9 billion in Q1 to 514 deals worth $6.7 billion in Q2, the report said.

“Crypto has clearly been one of the most attractive investments for VCs in recent quarters, but growth has been at an unsustainable pace, so a slowdown in that area is not something that is unexpected,” Stanford said.

But venture capitalists still have a lot of money to invest. The number of deals has remained relatively high in all phases, with seed pushing to recent highs with an estimated 1,400 deals. The momentum of the past six months continues to drive new deal announcements, which is a positive sign for the market, especially when compared to industry stories.

With more than $230 billion in dry powder and nearly 3,000 funds closed since early 2019, the NVCA said we can expect investment to continue until more certainty can be found in economic markets.

“There’s a lot of dry powder and a lot of available capital on the market,” Stanford said. “But we just see a little more caution, and rightly so, than in 2021.”

The slowdown is likely to last for several quarters as long as we see uncertainty in stock markets, rate hikes and inflation growth, Stanford said.

Barring a massive recession or bad news, the venture market is likely to have many investors ready to put capital to work and invest money.

“There is a pool of VC money ready to be deployed. But at the moment everyone is a little more cautious than they were in 2021,” Stanford said.

Venture capital fundraising in the US reached $120 billion in 2021 for the second consecutive year. A strong performance from incumbent managers in the first half of the year has pushed the capital raised at a record pace. These managers closed 203 funds worth $94.7 billion in the first six months of the year. So far, 30 funds have closed at least $1 billion in commitments, eight more than the previous full-year record of 22 set last year.

While this activity is most likely a continuation of the momentum from 2021, it is still an encouraging sign around the level of capital availability due to the uncertainty that may bring in the coming years, especially if inflation persists and a recession enters .

But one thing holding back investment and returns for the VC industry is the weak public markets. The first public offering window remains closed, keeping exit values ​​low. The second quarter was very similar to the first in terms of exit activity, with the biggest change from the past two years being the complete lack of traditional IPOs.

In 2021, nearly 86% ($667.1 billion) of the record exit value ($777.4 billion) was generated through public lists of VC-backed companies, highlighting the impact a closed IPO window could have on the industry. SPAC mergers also faced tougher conditions in the second quarter, bringing the total number of public listings closed in 2022 to a minuscule 42. cohort of companies.

As the public markets are ravaged, Stanford pointed out that there are about 1,200 unicorns worldwide, which refers to private companies valued at $1 billion or more. Those companies (assuming they survive) are likely to move into IPOs once public markets stabilize. Meanwhile, companies can go into debt to extend their runway.

As for layoffs hitting many companies in the market, Stanford believes this was due to a lot of overstaffing in 2021.

The private market usually lags behind major changes in the public markets. So if the public markets were to turn around in the third quarter, we might not see this in the private markets until much later. Stanford said the broader economy is teetering on a recession, but the VC industry isn’t necessarily in it yet.

“Everyone is probably still just taking the precautions they need to be able to respond to a recession when needed,” he said. “It’s not necessarily a recession market for VCs right now. It’s just more cautious than we saw last year. Some of that is good for the venture market, as 2021 was so overheated in terms of deal sizes, valuations and fundraising. I think it’s good for everyone to step back and take a deep breath and get the venture market back to a more sustainable pace of growth.”

The impact of a slowdown may be more noticeable in smaller markets where the venture capitalists have not raised a large amount of capital, Stanford said.

“Without those local investors, the companies cannot enter the life cycle of a company. And those ecosystems can lose momentum that they’re gaining or not using,” Stanford said.

The PitchBook-NVCA Venture Monitor First Look is a preliminary release of key venture industry figures for the US market, intended as a first-to-market source of key data sets and findings. It will serve as a preview of the full PitchBook-NVCA Venture Monitor, which will be released in full shortly after these initial numbers are made public.