U.S. startup funding continues to fall in 2022 as deal activity comes back down to earth after last year's record growth.
Attention on the tech downturn of 2022 has focused primarily on later-stage deals, which are impacted the most by rising interest rates and turmoil in the public markets, the third quarter was no exception.
Public listings are at record lows, exits are down almost 50% from historical norms, and the total amount of venture capital invested in late-stage startup deals hit its lowest point in 11 quarters at $24.9 billion, down 48% from the second quarter. That's according to the latest quarterly Venture Monitor report from Pitchbook, which also found median late-stage deal size last quarter was $10 million, down from $15 million in 2021.
Overall, VC investment totaled just $43 billion last quarter, the lowest point in more than two years, and estimated deal counts (4,074) are down around 20% from the first quarter of 2022, according to Pitchbook.
But the slowdown isn't just impacting mature startups on the precipice of an exit; it's also affecting startups at the earliest stages.
Angel and seed-stage startups, typically more immune to the economic challenges faced by later stage upstarts, are starting to feel the squeeze. After proving resilient during the first half of 2022, angel and seed-stager startups raised $4.7 billion in the third quarter, down from $6.6 billion in the first quarter.
But there's some reason for optimism. Early-stage deal amounts are still outpacing pre-pandemic levels, and even what we saw in the first half of 2021, according to Pitchbook. There's also been a record number of micro VC funds launched since 2021 — 779 — which will be ready to deploy capital "once the market returns to a more normal investment climate," the report said.
A record amount of dry powder
Another reason for a glass-half-full approach to U.S. startup activity is the amount of capital raised by U.S. startup investors. Through just three quarters, capital raised by U.S. venture firms has climbed to $150 billion in 2022, which has already surpassed 2021's yearly total of $147 billion, a record high. There's more than $290 billion collectively held by U.S. venture firms, the most dry powder the country's venture ecosystem has ever had on hand, according to Pitchbook.
More than 2,500 VC funds have closed since the beginning of 2020, which is about the same number of U.S. funds closed from all of 2006 through 2015, the report said. The amount of capital available to startups is a sign the private tech sector could be primed for growth once the economy stabilizes.
Overall, the picture painted by the year's venture figures may be less about an abrupt industry shift, but rather an indication of just how unusual 2021's venture environment really was.
"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," John Gabbert, founder and CEO of PitchBook, said 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.”
Exits pump the brakes
One area of the venture ecosystem that's seen an especially stark drop off is startup exits, both via public listings and merger-and-acquisition activity. Just $14 billion was created in exit value last quarter, the lowest amount since 2016. The quarterly data doesn't take into account Figma's announced $20 billion acquisition by Adobe, which has yet to officially close.
Exit deal value is expected to fall below $100 million this year for the first time since 2016. Exit value reached $781 billion in 2021, $324 billion in 2020, and $268 billion in 2019.
A lack of startup exits could make investors skittish about pouring more money into the startup ecosystem, Pitchbook said. But after a summer slowdown, M&A activity could be poised for a rebound. In a separate Pitchbook report released last week, M&A deal advisers and investors are expecting a "significant increase in acquisitions later this year and into 2023."
"There is a lot [of deal activity] in progress right now," Aly Simons, a partner and co-chair of the tech M&A practice at Goodwin, told Pitchbook, adding that there's a "massive set" of deals between big tech firms and VC-backed startups in the works.
