U.S. venture capital investments fell to the lowest level in nine quarters in the third quarter ended September 30, according to the Q3 2022 PitchBook-NVCA Venture Monitor.

The market stall came as the VC ecosystem is showing more signs of distress in response to ongoing economic headwinds. But it’s also happening at a time when VCs are sitting 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 J.P. Morgan.

Deal counts fell across all stages for the second consecutive quarter after reaching a record high in Q1 2022 and total money invested reached a nine-quarter low, cementing a tone of investor hesitancy and increased focus on business fundamentals.

This pullback was especially pronounced at the late stage, where nontraditional investors – the largest drivers of mega deals and the overall growth seen at the top of the market – slowed investment in VC-backed startups. Aside from several outsized deals in Q3, annual exit activity has also been lethargic, with 2022’s exit value on pace to fall below $100 billion for the first time since 2016.

NVCA: Deal making is in decline.

In stark contrast to deal and exit activity and value, VC fundraising has already reached a new annual record in the first three quarters of the year. With over $290 billion in dry powder, by far the largest amount that has ever been stored in VC funds, general partners have more than enough capital to support innovative startups through their venture lifecycle in the coming years despite the tumultuous economic environment.

“The VC slowdown narrative that has been pervasive in the market this year has finally materialized in the data, with nearly every metric aside from fundraising falling sharply in Q3,” said John Gabbert, CEO of PitchBook, in a statement. “The VC ecosystem, however, has shown remarkable resiliency in the face of continued economic headwinds, raising record levels of capital and closing an unexpectedly high number of deals. In many ways, 2021 was an outlier year, and the VC market is now returning to pre-pandemic levels and long-term trends of steady growth.”

Investment activity

NVCA and Pitchbook reported Q3 venture investments dropped.
NVCA and Pitchbook reported Q3 venture investments dropped.

VC investment totaled just $43 billion across an estimated 4,074 deals in Q3 2022, a nine-quarter low for deal value. Estimated deal counts have fallen nearly 20% from the quarterly high in Q1 2022 – the lowest count since Q4 2020.

Aside from corporate VC (CVC) investors, nontraditional investor participation fell faster than the broader venture market in 2022. Private equity firms have participated in just 48.3% of deal value in 2022 and asset managers just 34.9% compared to 58.5% and 43.6% in 2021, respectively.

Meanwhile, CVCs have participated in 25.6% of VC deals year-to-date, as well as nearly 45.3% of deal value; both figures are in line with past yearly highs.

Total dollars invested in late-stage VC decreased by 48.3% from the Q2 figure of $48.1 billion and set a record eleven-quarter low. The median late-stage deal size in Q3, $10.0 million, decreased by a third from the 2021 full-year figure of $15 million.

Fundraising activity

VCs are still raising money.
VCs are still raising money.

U.S. VC fundraising reached a new annual high of $150.9 billion in Q3, surpassing last year’s previous record and taking the 21-month fundraising total above $298.1 billion. We are beginning to see momentum atrophy, however, 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 the record fundraising has gone 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 GPs with limited or no historical track records.

Nearly 2,600 VC funds have been closed since the beginning of 2020, with the majority of these still within their new investment period. That is roughly the same number the U.S. market saw closed from 2006 through 2015.

Exit activity

One deal close
One $20B deal that hasn’t yet closed will skew results for Q3/Q4.

With just $14 billion in exit value generated across an estimated 302 exits in Q3, this year’s total exit value is in danger of falling below $100 billion for the first time since 2016.

So far, 2022 has produced only 59 public listings, just one year after a record 303 VC-backed public listings generated $670 billion in exit value. The frozen IPO market continued in Q3, with just five companies exiting via traditional IPOs this quarter.

SPACs – special purpose acquisition companies once pervasive in the market – have all but disappeared, with only three SPACs completing listing this quarter, a far cry from the peak of 281 listings in Q1 2021. Many of the remaining SPACs that have yet to complete acquisitions are nearing their two-year time limit, at which point shareholders can opt to have their investment returned.

“As they contend with ongoing market volatility and declining growth forecasts, startups and investors are still trying to find their footing on valuations,” said Pamela Aldsworth, head of venture capital coverage at J.P. Morgan Commercial Banking, in a statement. “Founders will likely face some tough choices in the coming months as they work to position their companies for long-term success. For those with ample runway, now is a good time to block out the noise and build.”

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