Q3 Update on US Venture Capital
Early stage deals and valuations stay strong, late stage deals and valuations are showing a slowdown
Summarizing the latest findings in PitchBooks Q3 2022 US Valuations Report
Authors Note:
While 2021 was very strong for venture capital deal activity across the US, 2022 has shown a reaction to the market uncertainty. The US market representing the lion-share of deal-activity in venture capital globally provides signals for other markets of what is to unfold.
From the data coming out of Q3, late stage venture capital deals have taken the largest hits in Valuation, Volume, RVVC and VVC. The valuation/PE ratio declines to public market technology is trickling down into late stage deals. The backup at the late stage is further impacted by the inability of companies to exit. More than 1,200 unicorns operate globally and there is a significant lack of exit value. While 2019–2021 favoured late stage deals and growth in inflation helped push deal values forward, attention is shifting to early stage deals.
Early stage deals (angel and seed) paint a different picture. Early stage deals stay relatively strong with average valuations rising and deal volumes rising (at decreasing QoQ speeds). Angel deals haven’t changed much with moderate growth in average cheque sizes. Seed stage deals are receiving more allocation from mix-stage funds favouring lower valuation ranges. However, there is a historically high amount of dry powder sitting in firms coffers observing the macroeconomic environment. Many funds are reserving capital for follow on investments in current deals.
What this means for ventures:
- Late stage ventures will have to rely heavily on fundamentals in proving PE ratios and multiples, while many will have a hard time exiting
- Mid stage and early stage ventures will see a trickle down in early 2023 from the late stage venture market in lower valuations and deal volumes
- However, with many early stage fund managers looking for a macro-economic jump over the course of the fund lifecycle, there will be an opportune time for early stage ventures to enjoy releasing of dry powder mid to late 2023
- If startup founders are looking to raise capital, raising lower amounts at lower valuations will ensure good business continuity
- Focusing on growth in IP, Assets, and Cashflow will be paramount to ensure weathering the turbulent next
What this means for venture fund mangers:
- Fund managers will have an increasingly hard time to raise capital from limited partners due to the down correction of public and private equities in portfolios
- Fund managers will need to get creative in fundraising and adopt micro-fund models with lower management fees (SPVs, Syndicates etc.) to get into deals
- Late stage funds will see an opportunity in 2023 to raise capital from LPs to close the gap being left open from the market
- Mixed-stage funds should look earlier for deals as the combination of micro-macro economic growth anticipated over the fund lifecycle will result in higher averages in TVPI and IRR
The PitchBook Q3 US Valuations Report
Key Takeaways from the Report:
- Median and average late-stage VC valuations have taken a significant hit in 2022, a quick fall after the rapid rise seen in 2021
- For all the turmoil at the latest stages of VC, seed and early-stage valuations have remained at the elevated levels achieved in 2021
- The backup at the late stage is being further impacted by the inability of companies to exit
- The volatility in late stage deals will eventually trickle down into early stage deals
Early Stage Deals
- Angel investment deals haven’t changed much, with average deal values rising to a 10 year high of $1M.
- Seed investment deals are continuing to rise and average cheque sizes have risen to all time highs of ~$4.5M.
- More than $73 billion in dry powder was available in funds under $250 million as of June 30, 2022, a high amount of capital largely focused on the earlier stages of venture.
- Nontraditional investor participation (Family Offices and HNIs) at the seed stage has set a new annual record of $6.7 billion in total deal value through Q3.
- The median seed stage investor deal is acquiring between 26–28% in ownership shares of deals.
- Early-stage VC has seen valuations decline a bit more than seed, yet median valuations continue to be much higher than figures seen prior to 2021.
- This points to futures on startup deals being less optimistic but the industry is still deploying more than ever before
Late Stage Deals
- The late stage of venture has seen the impacts of volatility more than any other area of the market so far.
- Late stage deal values fell to an 11-quarter low in Q3 ($24.9 B) and have seen more than a 20% decline in volume.
- More capital is expected to be sought at the late stage this year than ever before, yet the availability from investors, especially large nontraditional institutions, seems likely to leave a large gap between the numbers.
- The median relative velocity of value creation (RVVC) and velocity of value creation (VVC) calculations have fallen for late-stage VC, the only stage to see a drop.
If you have any questions or anything above is inaccurate please reach out to author below:
Author: Ashley R. Martis (https://www.linkedin.com/in/martis/ or ash@startupfuel.com)
Venture Partner | VC Expert | Venture Diligence & Valuation Expert
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