A Great Year in VC Tempered by Declining Quarterly Results

“A Quarterly Wink and a Glance at Venture Capital”

Venture capital (“VC”) funds invested $238 billion in almost 16,000 deals in 2022. This compared unfavorably to the $345 billion invested over 18,500 deals in the record year of 2021. While 2022 was a great year for VC investment, and the second-best year of the last decade, there is a little concern because quarterly VC investment in 2022 looks like an upside-down hockey stick. Last year saw four consecutive quarters of declining VC dollars invested. In fact, Q4 2022 saw the smallest amount of VC investment for the year.

VC-Backed Exits Are Hard to Find in 2022

With only $71 billion in exit value in 2022, this was the first time since 2016 that annual exit values were below $100 billion. This represents quite a decline from 2021 exit values of more than $753 billion. In Q4 2022, there were only $5.2 billion in exits, which was the lowest quarterly total in more than a decade.

In 2022, public listings of VC-backed companies came to a grinding halt. There were only 14 IPOs in Q4. For the full year 2022, VC-backed exits via IPOs hit a five-year low.

2022 Sets Annual Record for Fundraising

In 2022, VC funds raised $163 billion for 769 funds, which was an annual record. This also represented the second year in a row where fundraising exceeded $150 billion. The record year in 2022 occurred even though fundraising hit a rough patch in Q4 2022, with only $12 billion raised.   LPs might be starting to feel that they are overexposed to VC asset class. Most of the capital raised in 2022 was placed with larger funds with more experienced investment professionals. A total of 71% of the capital raised in 2022 went to funds greater than $500 million. In 2022, 35 funds closed with more than $1 billion in commitments. After three years of dealing with COVID issues, there has been a return to the traditional areas for VC dollars, with 73% of the capital raised in Silicon Valley and New York.

Corporate Venture Capital Still a Major Player in the Venture Space

Even with hedge funds, asset managers and sovereign wealth funds beginning to slow down investments in VC, corporate VC groups participated in more deals in 2022 than in 2021. In 2022, more than 26% of the U.S. VC deals included a corporate VC participant. The big question is whether future corporate VC investment will be negatively affected by rising interest rates and global economic uncertainty.

Different Picture at Each Stage of Deal Activity

At the angel and seed stages, deal activity declined over the four quarters of 2022, however, $21 billion was invested in approximately 7,300 deals. In 2022, the median-seed pre-money valuation was approximately $10.5 million, which represents a 17% increase from 2021.

In 2022, early-stage VC saw $68 billion invested in almost 5,600 deals. Even though it fell short of the $88 billion invested in early-stage VC in 2021, it was still the second-best year of the last decade. The median, early-stage pre-money valuation was $50 million, which represents a year-over-year increase of 19%.

Late-stage deal activity showed quarterly declines in every quarter in 2022. For the full year, $94 billion was invested in almost 4,300 deals. However, in Q4 2022, only $13.5 billion was invested in late-stage deals. This was the lowest quarterly deal value for late-stage VC over the past four years. The median, late-stage pre-money valuation was $67 million in 2022, which represents more than a 10% decline from the median pre-money valuation of $75 million in 2021.

Valuations of Larger Deals Negatively Impacted by Public Market Performance

Public market volatility in the tech space has certainly impacted the valuations of private companies in similar sectors. With the lack of liquidity options, investors now have the upper hand in negotiating favorable valuations and deal terms. The gap between founder valuations and investor valuations is getting wider. Founders are trying to get their cash to last as long as possible in order to avoid raising capital at lower valuations. Many are expecting for down rounds to be more common in 2023.

Outlook

Increases in interest rates, public market volatility and global turmoil may finally be slowing down the VC sector. It was a very good year for VC in 2022, even though it fell short of the record results of 2021. When you look at the quarterly trends in 2022, you see that VC activity dropped sharply between Q1 and Q4. Will declines in VC activity continue into 2023, or will the dry powder sitting on the sidelines get invested and set up 2023 for a record performance? We should have a better idea after Q1.