Twin Cities-based venture capital firms are bracing for a continuation of a market downturn in 2023, as the broader U.S. ecosystem anticipates declines in deal value and fundraising this year.
Nationwide, later-stage companies are expected to take hits, including lowered deal value and reduced valuations, while venture capital fundraising could fall from $162.6 billion in 2022 to between $120 billion to $130 billion this year, according to a recent 2023 outlook report by Pitchbook.
A market downturn that already started in 2022 is expected to continue, local VC leaders say.
That downturn on a national scale is apparent in recent Pitchbook data, finding gradual declines in deal activity throughout last year in the early and late stages, among nontraditional investors and in exits, which saw a sharp decline compared to 2021.
Continued economic uncertainty will prompt investors to write fewer checks, making it harder for startups to fundraise, Bread & Butter Ventures Managing Partner Brett Brohl said.
Startups will take longer to fundraise and see suppressed valuations, said Reed Robinson, pre-seed investment firm Groove Capital’s founding partner.
However, growth is still important, he said, adding that startups will need to get lean to extend their runway.
Those that “end up being very successful coming out of this current economy … are going to be the ones that continue to do work, that continue to be active,” Brohl said.
All is not bleak, Pitchbook says. Among the earliest of stages, seed-stage startups are expected to see valuations and deal sizes reach new annual highs despite a decline in total deal value and count.
Early-stage startups won't be as affected because they have longer timelines before exiting, Brohl said.
This is particularly true for med-tech companies in Engage Venture Partners' portfolio as the Minneapolis firm still expects strong returns down the road, beyond the short-term volatility, Founder and Managing Director Kelly Prchal said.
Seeing the current market conditions, early-stage startups will be better able to plan, stretching money further, said Adam Choe, a managing partner at Tundra Ventures.
For companies in later stages, those having Series C or D funding rounds, Pitchbook says it anticipates they will see the most “down rounds,” or situations where companies had to give their valuations a haircut.
"If you're a company that was thinking about IPOing in 2022-2023, you're certainly pushing that back to 2024 already," Brohl said.
However, on the venture capitalist side, such an era of market volatility is the best time to invest, VC leaders say.
“Builders build good products when things are tough,” Choe said.
Investing when there are lowered valuations can mean better returns later when the economy improves, Robinson said.
“This is the time to be doubling down," he said, pointing to Groove’s new $15 million fund.
Sustaining itself, rather than exponential growth, is what the Twin Cities startup-VC ecosystem is likely to experience in 2023, Choe said. “We've got a great foundation in place now, hopefully; let's look to further solidify that.”
