NVCA: U.S. venture investing slowed more in Q2 as economic fears rose

The value of U.S. venture capital deals declined significantly in the second quarter of 2022 as economic fears rose and Russia attacked Ukraine.

The PitchBook-NVCA Venture Monitor First Look (preliminary data) showed a slowdown in the second quarter in the U.S. market, which is the biggest worldwide. The outsized deals that became a hallmark of 2021 are a distant memory as investors take a more cautious approach to the largest deals in the market.

While the VC industry may not be suffering as much as public market investors, the crypto speculators, or ordinary people hurt by inflation and the pandemic, it is a concern if the VC industry slows down because startups have been such an engine of job growth for the U.S.

Q2 2022 was the first quarter since Q4 2020 to post less than $77 billion in completed deal value, with just over $62 billion closed. To put the slowdown in perspective, the deal value in Q2 2022 was the highest of any quarter before Q4 2020.

Deal counts are down 10% from the first quarter to the second quarter. But deal value fell from $94.4 billion in Q4 2021 and $82 billion in Q1 2022 to $52.3 billion in Q2. Median valuations have stayed pretty steady, but the top stages with inflated valuations are gone, said Kyle Stanford, senior analyst at Pitchbook, in an interview with VentureBeat.

NVCA first look data in Q2 2022.

“Right now we are seeing pretty strong prices in the market. Deal counts declined, but it’s really not too bad, and it is still one of the highest quarters of all time,” said Stanford. “Deal value has dropped pretty significantly from last year, though. That was pretty expected as it is the first quarter since Q4 2020 that had less than $77 billion invested.”

Cryptocurrrency investments suffered in particular. Cryptocurrency and blockchain VC deal activity on a global basis fell from 656 deals worth $9.9 billion in Q1 to 514 deals worth $6.7 billion in Q2, the report said.

“Crypto, obviously, has been one of the most attractive investments for VCs for the past couple quarters, but the growth was at an unsustainable pace and so a slowdown is not something to be unexpected in that area,” Stanford said.

But venture capitalists still have a lot of funds to invest. Deal counts have stayed relatively high across all stages, with seed pushing toward recent highs at an estimated 1,400 deals. Momentum from the past six months continues to bring new deal announcements, which is a positive sign for the market — especially compared to industry narratives.

With well more than $230 billion in dry powder and nearly 3,000 funds being closed since the beginning of 2019, the NVCA said we can expect investments to continue until more certainty can be found across economic markets.

“There’s a lot of dry powder and a lot of available capital to the market,” Stanford said. “But we’re just seeing a little more caution, and rightly so, than we were in 2021.”

The slowdown will likely continue for multiple quarters so long as we see uncertainty in the stock markets, interest rate hikes and inflation growth, Stanford said.

nvca q2 3
U.S. VC deal activity has slowed in 2022 compared to last year’s record year.

Barring a massive recession or worse news, the venture market will likely have a lot of investors ready to put capital to work and invest money.

“There is a storage of VC money ready to be deployed. But right now everyone’s taking a little more caution than they were in 2021,” Stanford said.

U.S. VC fundraising topped $120 billion for second consecutive year in 2021. A strong showing from established managers in the first half of the year has pushed capital raised to a record pace. These managers have closed 203 funds worth $94.7 billion through the first six months of the year. Already, 30 funds have closed on at least $1 billion in commitments, eight more than the previous full-year high of 22 recorded last year.

While this activity is most likely a continuation of momentum from 2021, it’s still an encouraging sign around the level of capital availability through the uncertainty that the next few years may bring, particularly if inflation continues to last and a recession sets in.

But one thing holding back the investments and returns for the VC industry is the weak public markets. The initial public offering window remains closed, keeping exit values depressed. The second quarter was much like the first in terms of exit activity, with the biggest change from the last two years being the complete lack of traditional IPOs.

In 2021, nearly 86% ($667.1 billion) of the record exit value ($777.4 billion) was generated through public listings of VC-backed companies, highlighting the impact a closed IPO window could have on the industry. SPAC mergers also faced tougher conditions during the second quarter, bringing the total number of public listings closed in 2022 to a miniscule 42. This activity is most concerning for the billion-dollar exits, as public listings have been the main source of liquidity for that cohort of companies.

While the public markets are getting pummeled, Stanford pointed out there are 1,200 or so unicorns globally, which refers to private companies with a valuation of $1 billion or more. Those companies (assuming they survive) are likely to head for IPOs once the public markets stabilize. In the meantime, companies can take on debt to lengthen their runway.

As for layoffs hitting a lot of companies in the market, Stanford believes it was due to a lot of overhiring in 2021.

The private market usually lags big changes in the public markets. So if the public markets were to turn around in Q3, we might not see it in the private markets until much later. Stanford said the broader economy is teetering on a recession, but the VC industry isn’t necessarily in one yet.

first look
The NVCA Venture Monitor’s first look.

“Everyone is still probably just taking the precautions necessary to be able to react as they as need to a recession,” he said. “It’s not necessarily a recession market for VCs now. It’s just more cautious than we saw last year. Some of that is good for the venture market as 2021 was so overheated in deal sizes, valuations and fundraising. I think it’s good for everyone to take a step back and take a deep breath and make sure that the venture market gets back to a more sustainable pace of growth.”

The impact of a slowdown may be more noticeable in smaller markets where the venture investors have not raised a large amount of capital, Stanford said.

“Without those local investors, the companies won’t get into the venture lifecycle. And those ecosystems might lose the momentum they gain or not to use,” Stanford said.

The PitchBook-NVCA Venture Monitor First Look is a preliminary release of top-line venture industry figures for the U.S. market, intended as a first-to-market source of key datasets and findings. It will serve as a preview of the full PitchBook-NVCA Venture Monitor, which will be released in full shortly after these initial figures are made public.

Originally appeared on: TheSpuzz

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