NVCA: US venture capital at two-year low

U.S. venture capital investment fell to nine-quarter lows in the third quarter ended Sept. 30, according to the Q3 2022 PitchBook report.NVCA Venture Monitor.

The market stall came as the VC ecosystem shows more signs of distress in response to ongoing economic headwinds. But it also happens at a time when VCs sit on a lot of dry powder. The report is jointly produced by PitchBook and the National Venture Capital Association (NVCA) with support from Insperity and JP Morgan.

The number of deals fell for the second consecutive quarter across all phases after hitting an all-time high in the first quarter of 2022 and total money invested hit a nine-quarter low, exacerbating investor hesitation and increasing focus on company fundamentals.

This slump was especially pronounced in the late stage, when non-traditional investors — the biggest drivers of megadeals and overall growth at the top of the market — slowed investment in venture-backed startups. Aside from several outrageous deals in the third quarter, annual exit activity was also lethargic, with a 2022 exit falling below $100 billion for the first time since 2016.

In stark contrast to the deal and exit activity and value, venture capital fundraising has already hit a new year-on-year record in the first three quarters of the year. With more than $290 billion in dry powder, by far the largest amount ever stored in VC funds, general partners have more than enough capital to support innovative startups throughout their enterprise lifecycles for years to come, despite the tumultuous economic environment.

“The VC slowdown story that has been ubiquitous in the market this year has finally materialized in the data, with nearly every metric except fundraising dropping sharply in the third quarter,” PitchBook CEO John Gabbert said in a statement. “However, the VC ecosystem has shown remarkable resilience in the face of continued economic headwinds, pushing record levels of capital and closing an unexpectedly high number of deals. In many ways, 2021 was an outlier and the VC market is now returning to pre-pandemic levels and long-term trends of steady growth.”

Investment activity

VC investments totaled just $43 billion on an estimated 4,074 deals in Q3 2022, a nine-quarter low for deal value. The estimated number of deals is down nearly 20% from its quarterly high in Q1 2022 – the lowest number since Q4 2020.

Excluding corporate VC (CVC) investors, participation from non-traditional investors declined faster than the broader venture market in 2022. Private equity firms participated only 48.3% of the deal value in 2022 and asset managers only 34.9%, compared to 58.5% and 43.6% in 2021 respectively.

Meanwhile, CVCs have participated in 25.6% of VC deals to date, as well as nearly 45.3% of the deal’s value; both numbers are in line with previous annual highs.

Total dollars invested in late-stage VC fell 48.3% from the Q2 figure of $48.1 billion, reaching an all-time high in 11 quarters. The median deal size in the third quarter, $10.0 million, was down a third from the full year 2021 of $15 million.

Fundraising activity

U.S. venture capital fund raising hit a new annual record of $150.9 billion in the third quarter, surpassing last year’s record and taking 21 months’ total fundraising above $298.1 billion. However, we’re starting to see momentum waning, with just $29.4 billion in fundraising added to the dataset since the Q2 report, the lowest quarterly total this year.

In 2022, 79% of record fundraising went to funds led by established managers. Emerging managers suffer disproportionately during economic downturns as limited partners are less likely to increase their VC allocations and commit to primary care physicians with limited or no historical track record.

Nearly 2,600 venture capital funds have closed since early 2020, the majority of which are still in their new investment period. That’s about the same number that saw the US market closed from 2006 to 2015.

Close activity

With just $14 billion in exit value generated across an estimated 302 exits in the third quarter, this year’s total exit value is in danger of falling below $100 billion for the first time since 2016.

So far, 2022 has delivered only 59 public listings, just a year after a record 303 VC-backed public listings generated $670 billion in exit value. The frozen IPO market continued into the third quarter, with only five companies exiting through traditional IPOs this quarter.

SPACs — special-purpose acquisitions that were once ubiquitous in the market — have all but disappeared, with only three SPACs completing listing this quarter, a far cry from the peak of 281 offerings in Q1 2021. Many of the remaining SPACs those who have yet to complete the acquisitions are approaching their two-year term, after which shareholders can choose to get their investment back.

“While battling continued market volatility and declining growth forecasts, startups and investors are still trying to navigate valuations,” Pamela Aldsworth, chief of venture capital coverage at JP Morgan Commercial Banking, said in a statement. “Founders are likely to face difficult choices in the coming months as they work to position their companies for long-term success. For those with a spacious runway, now is a good time to block out the noise and build. ”