While 2021 was a year unlike any other for Chicago startups, 2022 proved to be a much different story, and Chicago startups are waiting to see if venture capital funding can get back into the swing of things to begin the new year.
Last year saw a noted deceleration in venture funding, with just nine U.S. venture funding rounds resulting in a post-money valuation of $1 billion or higher in November compared to 48 in January, according to PitchBook.
“We also believe that down rounds and further slowing of valuation growth are likely to be trends in U.S. venture in 2023,” PitchBook's report noted.
The report, which provides an early outlook for U.S. venture capital activity for 2023, also shows that mega funding rounds, classified as $100 million or more, will fall to a three-year low in 2023.
Not everyone is convinced.
Chicago Inno spoke with several local investors who expect to see big things from Chicago tech in 2023.
After all, PitchBook reports there’s more than $290 billion collectively held by U.S. venture firms, the most dry powder — that is, money that has been committed by investors but not yet spent — the country’s venture ecosystem has ever had on hand.
Dry powder may turn to fuel for some VCs in 2023
Nick Cromydas, co-founder and CEO of Hunt Club, who previously founded New Coast Ventures — a venture studio that started or invested in more than 40 early-stage startups — thinks it’s only a matter of time before the market kicks back into full gear.
“There’s $290 billion sitting on the sidelines and I think there's another $700 billion or so in private equity capital sitting on the sidelines. I suspect that investors will start deploying again, whether it's Q1, Q2 or Q3, and that will start some of the similar cycles we saw across 2020 and 2021,” he told Chicago Inno. “I think their jobs are to invest and right now, some of the best investment opportunities of their careers may come forth given valuations being compressed.”
After recently launching an inaugural $41 million fund for early-stage venture firm 81 Collection, Vijen Patel is also excited for what the future may hold despite the down market.
“We are sitting on 85% dry powder and so we’re very bullish, because valuations are coming down,” he said. "The macro environment is in a bit of a shock so I'm feeling pretty excited about our prospects. We think this next year of deployment might be one of the best vintages because of the macro environment.”
Chicago venture firm Jump Capital raised a $350 million fund at the end of 2021 to invest in fintech, crypto and other startups, areas in which co-founder and partner Sach Chitnis thinks deal flow will start to pick up in the middle to second half of the year as a lot of founders that have been hibernating come out of the woodwork.
“We have a lot of dry powder and we’re active out there today,” he explained. “We’re not shy about still entering the market and working through deals, especially in areas that we know well.”
Reverting back to the coasts
One question Chitnis has moving forward is how long remote work and other pandemic-related trends will continue.
“For me to call a VC on the coast to look at a company that's based in Chicago back in 2014 was vastly different than 2021,” he explained.
Chicago became much more than just “flyover country” to VC investors over the course of the pandemic as geographical separation became much less of an obstacle with everyone working from home anyway.
“The question — and this is what I'm curious to see because it's not clear yet — is whether people revert back with a downturn and get back to basics,” Chitnis wondered. “Does deal sourcing go back to being a bicycle ride away?”
