Current VC Market Continues to Be Challenging

 A Quarterly Wink and a Glance at Venture Capital

The frothy VC days of 2021 certainly seem to be in the rearview mirror. A flight to quality by VC has seemingly led to a slowdown in capital deployed. This year is shaping up to be the lowest in terms of VC dollars invested since 2019. Through the first three quarters of 2023, $126 billion was invested in VC deals, compared to $347 billion and $245 billion in 2021 and 2022, respectively. Q3 2023 did see an uptick in terms of exits, with $35.8 billion generated from 284 exits. However, this is slightly misleading because 30% of the exit value was due to two large IPOs. The current market for VC continues to be challenging, with capital availability at low levels, and there is no sign that this will change in Q4. It certainly looks like capital availability will remain low until the exit market comes back to life.

Pre-Seed and Seed Activity

Activity in the pre-seed and seed stages is certainly taking a hit. In Q3 2023, only $3.2 billion was invested in 1,214 pre-seed and seed stage deals. It looks like 2023 will have the lowest number of pre-seed and seed stage deals since 2018. VCs have certainly slowed their pace of investment. However, valuations in 2023 are somewhat comparable to 2022. The median pre-seed valuation for the first three quarters of 2023 was $5.7 million compared to $6 million in 2022. Median seed valuation in 2023 was $12 million compared to $11.1 million in 2022.

Early-Stage Activity

For the first three quarters of 2023, only $30 billion was invested in 4,015 early-stage deals. This year will probably have the lowest level of early-stage deal value since 2018. In fact, Q3 2023 saw only $8.5 billion invested in approximately 1,300 deals, and this was the lowest quarterly dollars invested since Q3 2017. Median valuations in the early stage for the first three quarters of 2023 are down, compared to 2022. At the end of Q3 2023, the median early-stage valuation was $85.7 million, which is more than 14% below the median valuation at the end of 2022. Lower valuations in 2023 are also leading to lower deal sizes. In 2023, the average early-stage deal size is $15.8 million, which is a 17% decline from 2022.

Late-Stage Activity

In 2023, the late stage has also seen a decline in the pace of capital deployed. For the first three quarters of 2023, $57.3 billion has been invested in 3,285 late-stage deals, which compares unfavorably to the $94.6 billion invested for all of 2022.

There also has been a decline in the number of megadeals. There were only 30 megadeals completed in Q3 2023, compared to 43 in Q3 2022. Median valuations in the late stage are down more than 20% since the end of 2022. At the end of Q3 2023, the median valuation was $210.4 million, compared to $263.8 million at the end of 2022. With the IPO market continuing to be dormant, many late-stage companies are now returning to the market to raise private capital. Many of these late-stage companies now risk taking on a down-round.

Exits Pick Up

Q3 2023 saw 284 exits totaling almost $36 billion dollars. This was the best quarter for exit values since Q4 2021. Before we get too optimistic, consider that more than 30% of the Q3 exit value was attributable to just two IPOs (Instacart and Klaviyo). In fact, both IPOs were priced at values significantly below the value at the last VC round. For the first three quarters of 2023, exit values for VC-backed companies stand at $51.5 billion, which is way below the exit values of $795.4 billion, $328.8 billion and $251.9 billion, achieved in 2021, 2020 and 2019, respectively.

Fundraising

It should not surprise anyone that fundraising by VC funds has slowed down considerably. Without a significant market for exits, VCs are having a difficult time returning capital to their limited partners. For the first three quarters of 2023, VCs only raised $42.7 billion in new capital across 344 funds. This is certainly a low number when you compare it to the $172.5 billion raised in 2022 and the $163.4 billion raised in 2021. Even though fundraising has slowed down, there is a considerable amount of dry powder on the sidelines. With VC activity slowing in 2023 for all stages, estimates are approximately $300 billion of dry powder is available to be invested.

Outlook

The last 18 months saw a time for change in the VC sector. There continues to be uncertainly in the direction of the market due to continued interest rate increases along with the global economic situation impacted by conflicts around the world. Many U.S. VCs have invested in companies in Israel, and the present situation there cannot be good for those investments. Many people believe that the exit market will not change significantly in Q4, and capital availability will continue to be low. Q4 could be a good bellwether for what we can expect from VC in 2024.