VC Market Contraction in Q2 2022

DP:
So, Alan, we've got your second quarter report for 2022. And you used a word that you haven't used in a while, contraction. Tell us about that.
AW:I think there's contraction. And I think for the first time in a long time, there's volatility in the venture capital market. We've had a great run for a long time. Things can't always go up, it can't always look like a hockey stick. And I think, last year, we set records for deals closed, dollars invested, capital raised. This year, that deal volume has slowed down, primarily at the larger deal size, you're still seeing some frothiness in the seed and early stage investments. You're still seeing a record year in terms of the amount of capital that venture capital funds are raising from the limited partners. So, we are seeing contraction. And I think primarily, the contraction is due to volatility in the public markets, which is having a negative effect on the larger deals or the mega deals. But Dave, with all that being said, even though numbers are down so far for the first six months of 2022, it's still going to be a very good year. It's not going to be a record setting year, but in terms of the last 10 years, last decade, it's a good year.
DP:And I think that spills over into fundraising as well, right?
AW:Absolutely. The market for venture capital funds, raising capital is still quite frothy. I think we've raised about 120 billion for the first six months of the year. Compared to last year for the full year, they raised 139 billion, which was a record year. And if you look at fundraising by VCs over the last 10 years, it does look like a hockey stick. Every year has exceeded the prior year, it's certainly upwards sloping. And so, I see 2022 as being the new record. 120 billion for the first six months, compared to the annual record of 139 billion, I'm pretty sure we're going to exceed that. And I think the other interesting thing from a fundraising perspective is just the sheer size of the new funds that are being raised. I think for the first six months of this year, 30 funds have raised at least a billion dollars or more. So, it really tells a good story and entrepreneurs should have an easy time raising money for the next three to five years as these funds deploy their capital. But there's certainly a tremendous amount of capital out there waiting to be invested.
DP:But perhaps the same can't be said of the IPO market though, correct?
AW:The IPO market came to a grinding halt. And 2021, I think there were almost $800 billion of VC backed exits, and most of that through IPOs and SPACs. The first six months of this year, we've seen less than $50 billion in VC backed exits. And the number of IPOs has really come to a grinding halt. And I think that's a direct correlation to the volatility that we're seeing in the public markets for tech stocks. And we all know it's so difficult for any startup or any VC backed company to time the IPO market, but it looks like the window has dramatically closed. It might be open a crack, but it's dramatically closed.
DP:What about the perennial wild card valuations?
AW:At once again, you're seeing a correlation to the public markets. And for any of you who own tech stocks or follow tech stocks in the public markets, they're certainly down. And that includes even the blue chip companies like an Apple, a Tesla, Microsoft, Facebook, et cetera. And you're seeing those declines in valuations being seen in private company valuations also. It does take a little bit of time for private company valuations to have the impact that the public companies have had, but you're definitely seeing a decline in value.
DP:And what are you going to be looking at in the second half of 2022?
AW:Well, I think we're hoping that deal volume will increase and at a faster pace than we've seen the first six months of the year. Hey, look, I think you'd be remiss if you didn't look at the geopolitical situation around the globe. If you didn't look at interest rates and what the fed is going to do this week in terms of interest rate increases. We have to look at inflation. Supply chain is still infecting a lot of tech companies. So, I think you can't look at this in a vacuum, I think you have to look at what's going on externally around the world.
DP:Well, Alan, the markets do feel like they're at a little bit of a crossroad, so thank you for sorting that out for us.
AW:So, I think it's going to be an interesting time to review the markets at the end of the third quarter. Will give us a good indication of where 2020 is coming out. But I think you can't lose sight of the fact that between the amount of capital that has been raised by VCs this year and in the last couple of years, and also the amount of dry powder on the sidelines, they have a lot of capital to invest. And I think no matter how frothy the market is, great companies still find a way to raise money. And I think good companies that are being built by great entrepreneurs are going to find capital to support their growth.
DP:That's a good positive note to end on. Thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics, and join us for our next podcast when we get down to business.

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