VC Activity Shows Signs of a Slowdown in Q1 2022

A Quarterly Wink and a Glance at Venture Capital

It should come as no surprise to anyone that in Q1 2022, the VC industry could not maintain the record-setting investment levels of 2021. The VC industry is dealing with several headwinds simultaneously, including declining public market performance, inflation, rising interest rates, and economic and geopolitical uncertainty. In Q1, 4,822 VC deals were closed totaling $70.7 billion, which was far below the $90 billion of VC investment in Q4 2021. However, the Q1 deal count of 4,822 established a new quarterly record. Nontraditional investors continue to be significant contributors to VC performance. In Q1, nontraditional investors accounted for $52.5 billion, or 74% of VC deal value.

Public Market Activity Beginning to Slow Down

In Q1, there were only 28 VC-backed IPOs, which was the lowest total since Q1 2020. With the IPO option closing for VC-backed companies, many will go back into the market to raise a later series of venture capital or pursue exits to private or public companies. The poor performance of the public equity markets in Q1 has also negatively impacted the performance of VC-backed IPOs that were consummated in 2021. The ten largest VC-backed IPOs of 2021 are down between 18% and 68% when comparing their last post-money valuation prior to IPO and their current market cap. It is certainly an evolving market for the valuation of these growth stocks.

Exits for VC-Backed Companies Decline Dramatically in Q1

Quarterly VC-backed exit value averaged $194 billion in 2021. However, in Q1, VC-backed companies only achieved $33.6 billion in exits. A total of 431 exits closed in Q1, which is pretty much on par with the average of 466 exits per quarter in 2021. This slowdown in exit values was certainly attributable to a near halt in the IPO and SPAC markets as well as decline of the M&A market for VC-backed companies.

Median Valuations Vary Depending on Stage

Valuations of angel and seed-stage deals continue to show significant increases. In Q1 the median valuation for an angel and seed-stage deal was $12.5 million and $12 million, respectively, and these compared favorably with $7.1 million and $9 million, respectively, in 2021. Early-stage deals experienced a dramatic increase in median valuation in Q1. The median early-stage VC pre-money valuation was $67 million in Q1, and this was quite favorable compared to the $45 million valuation in 2021. Valuations for late-stage deals were little changed from 2021. In Q1, the median pre-money valuation for a late-stage deal was $120 million.

Mega-Deals Slow Down in Q1

In 2021, VCs invested almost $200 billion in 845 mega-deals—deals greater than $100 million. Mega-deal activity slowed considerably in Q1, with only $36.6 billion invested in 185 deals. The slowdown in mega-deal activity was the primary reason that VC investment activity declined in Q1 as compared to 2021.

Fundraising Remains Strong in 2022

Q1 saw 199 funds raise $73.8 billion in new commitments. Large funds dominated fundraising in Q1, with more than 86% of the capital raised by funds having more than $500 million in capital. VCs now have a record amount of dry powder, approximately $300 billion, looking to be invested. This dry powder should continue to provide momentum in the VC space, even if there are significant corrections in the market.

Outlook

Under any circumstance, it would have been very difficult for the VC industry to improve upon its performance in 2021. While Q1 performance was below levels achieved last year, it was still better that most years in the past decade. Public market performance and economic and geopolitical uncertainty have certainly impacted exit values; however, VCs are sitting on about $300 billion of capital to continue to drive investment activity. With 2021 in the rearview mirror, it looks like VC is at a tipping point. Q2 performance should be a good indicator for the remainder of 2022. In 2022, the VC industry might not exceed the records set in 2021, but it still could be a very good year.