After four record-high quarters last year, venture capital investment declined in the first quarter of 2022, according to a quarterly report from KPMG Private Enterprise.
This decline sent venture capital investments back to 2020 levels and has some within KPMG and the VC community wondering if it’s just a blip or the beginning of a dry spell, said Janet Lehman, an audit partner and the national leader for KPMG’s Venture Capital Life Sciences practice based in Boston.
There was over $4.8 billion invested across 234 deals in Boston this quarter, Lehman said, which is generally in line with Q1 2020 venture funding. National VC funding in 2020 was $166.6 billion compared to $329.9 billion in 2021, per Pitchbook data. Lehman noted that even though this quarter is a decline, 2020 was, at the time, the latest in a string of years where venture capital funding increased.
“2020 Boston VC investment was in of itself a record before those records were getting smashed in 2021,” Lehman said. “We’re still in a healthy environment in 2022.”
Lehman spoke with BostInno about some trends from this recent report, including this downturn in venture capital investments and what it means for Boston.
Global uncertainties hit home
Concerns about geopolitical unrest, inflation, supply chain issues and rising interest rates are creating uncertainty that impacts every VC market, Lehman said, including Boston. These uncertainties are impacting the markets and valuations of companies.
“(These) all create volatility and uncertainty for the investors, which increasingly they’re national investors. They’re not just local investors,” Lehman said.
While this can drive down VC deals, Lehman said Boston’s life sciences sector will help buoy it. She explained that investments in life sciences companies are typically driven by the technology, not the company’s valuation or revenue, and that the scientific advancements in this sector have never been stronger.
“In the immediate … we’re going to see some slowing in investment,” Lehman said. “But overall, I feel comfortable that we do have here in the Boston area these fundamental principles at work.”
Early-stage investments could take a hit
The report noted that early-stage investments will decrease in 2022 in light of geopolitical tensions and uncertainties. Similar to the beginning of the Covid-19 pandemic in 2020, KPMG predicts that investors will favor established companies to de-risk their portfolios.
Lehman said she still thinks the early-stage investments are going to be there in life sciences for the strongest science and technology.
“There could be fewer deals, but I think that for the best opportunities there will certainly be dollars available,” Lehman said.
Sign up for The Beat, BostInno’s free daily innovation newsletter from BostInno reporter Hannah Green.
M&As will be more popular than IPOs
All this uncertainty will lead to a suppressed number of IPOs in 2022, Lehman said. Lehman predicts Massachusetts will see fewer IPOs until geopolitical unrest subsides and the market settle.
The better opportunity for companies right now is mergers and acquisitions, she said.
“You can absolutely expect those to be on the rise,” Lehman said. “You’re going to have these large established players that are flush with cash, and a lot in particular in the life sciences, a lot of pharmaceutical companies, that are going to be just gobbling up startups because valuations are down.”
It’s very difficult to predict how the year will shake out
Lehman said she expects Q2 to be fairly consistent with Q1 of this year. However, she conceded that it’s difficult to make predictions given the uncertainties the world has faced over the last few years.
“It’s hard to say what’s going to happen past this quarter right here,” Lehman said. “What’s been happening over the last couple of months we couldn’t have predicted a couple of months ago.”
