Check out all the on-demand sessions from the Intelligent Security Summit here. The deal count in 2022 for the full year was 15,852, down 14% from 18,521 in 2021. And deal value was $238.3 billion, down 30% from $344.7 billion a year earlier, according to a report by Pitchbook and the National Venture Capital Association […]
The deal count in 2022 for the full year was 15,852, down 14% from 18,521 in 2021. And deal value was $238.3 billion, down 30% from $344.7 billion a year earlier, according to a report by Pitchbook and the National Venture Capital Association (NVCA).
U.S. VC exit activity was 1,208 deals valued at $71.4 billion, down dramatically from 1,925 deals valued at $753.2 billion a year earlier
With each quarter the deal activity declined and that could foreshadow a slide in 2023, the report said.
On an annual basis, angel- and seed-stage deal activity remained relatively resilient in 2022, with $21.0 billion invested across an estimated 7,261 deals. However, the four consecutive quarters of declining deal counts could foreshadow a continued slide in 2023. Seed-stage deal sizes and pre-money valuations demonstrated notable growth over the 2021 figures due in part to a large number of actively investing micro-funds as well as the participation of nontraditional and crossover investors.
Should the economic downturn continue, the NVCA expects this stage to start to feel pressure due to declining deal activity and investor demand in the early and late stages.
Nontraditional investors are slowing their capital deployment to VC amid less attractive risk/return profiles. Relative to 2021, the upside potential for the VC asset class declined significantly in 2022, which turned many investors away from the space. As such, just $24.1 billion in deal value involved nontraditional investors in Q4— the lowest quarterly value in three years. Not only are we seeing lower deal value, but we are also seeing fewer nontraditional participants within the venture ecosystem.
Exit activity continued its steep descent in 2022, with just $71.4 billion in total exit value generated—the first time this figure has dipped below $100 billion since 2016. Public exits of VC-backed companies have slowed to almost nonexistent levels, with just 14 public listings occurring in Q4, demonstrating how drastically institutional-investor appetite has been affected by rising interest rates and volatile macroeconomic factors.
Acquisition activity has also declined significantly; Q4 posted roughly $763 million in total acquisition deal value, the first time we have seen this quarterly total fall below $1 billion in more than a decade.
VCs still raised a record $162.6 billion across 767 funds, hitting a record for the second straight year exceeding $150 billion.
The year saw an increasing amount of capital concentrated in larger-sized funds led by experienced
managers within the Bay Area and New York VC ecosystems. Despite this capital concentration, capital raised by emerging managers led to the second-largest annual figure on record, and several middle-market ecosystems sustained or increased their fundraising activity compared with the prior year.
In December, the Morningstar PitchBook US Unicorn Index said it will show a negative return from January 1, 2023 through December 31, 2023. It predicted Series C and D rounds would see the most down rounds, as these companies are currently the most starved for capital.
It noted seed-stage startup valuations and deal sizes will continue their ascent, reaching new annual highs despite a slowdown in total deal value and count. And it said SPAC IPOs and mergers will continue to decline while liquidations will continue to increase in 2023.
It also predicted venture growth deal value will fall below $50 billion in the U.S. VC mega-round activity will fall below 400 deals, hitting a three-year low. And it said U.S. VC fundraising will fall between $120 billion and $130 billion in 2023.
Rationale: As of December 1, 2022, the US Unicorn Index has returned 1.0%
YTD, while our VC-Backed IPO Index is down 59.1%. This difference is due to
several factors, not the least of which being that nearly 200 unicorns have been
created in the US this year. However, the pace of new unicorn creation, and the
pace of unicorn rounds in general, has fallen precipitously in recent months. In
November, fewer than 10 completed rounds resulted in a post-money valuation
of $1.0 billion or more, well below the 48 completed in January, which saw the
year’s monthly high. With few new unicorn rounds maintaining the recency
bias toward private values, public comparables will impact unicorn pricing
more, putting downward pressure on the index as the public market remains
depressed.
Risks: While it continues to look less likely, a public market turnaround would
push the Unicorn Index into positive territory. Not only would increasing public
comparable prices put upward pressure on private values, but new unicorns
and new financings for current unicorns would also continue to have a positive
impact on the index as they have in 2022 and 2021.
The Morningstar PitchBook US Unicorn Indexes, which debuted in November, provide
insight into the opaque pricing of unicorns, companies with a post-money valuation
of $1.0 billion or more. The indexes are calculated daily using the most recent private
valuations and changes in public and private comparable companies.
Arguably the most important piece of the pricing model is the most recent valuation
of a company, pinning the value of a unicorn to its price upon completion of the round.
The further away from that round the company gets (there is a roughly 18-month span
between unicorn rounds), public and private comparable companies increasingly impact
the company’s valuation.
When we look at the 2022 US index return of 1.0%, the large number of unicorn rounds
throughout the year has tied many index constituents to their most recent priced round,
most of which were at a valuation step-up. At the same time, we have not yet seen a
marked increase in private company down rounds during the economic slowdown.
In 2022, the median step-up for late-stage valuations has been 2.1x—higher than the
median step-up in 2021. However, this figure has decreased rather quickly throughout
the year. The median late-stage step-up in Q3 2022 was just 1.8x, indicating that private
valuation growth, which would underpin unicorn valuations, are growing at a much
slower rate. We expect this trend to continue in 2023 so long as the public market is less
receptive to high-growth, high-loss companies, as many unicorns are likely to be seen.
The US Unicorn Index has returned much higher than what was seen in the broader
public market or in our VC-Backed IPO Index. However, in November just nine deals were
completed for a post-money valuation of $1.0 billion or more. We believe this trend will
continue, potentially falling even further as the pressure created by stagnating value in
the private market constrains activity. We also believe that down rounds and further
slowing of valuation growth are likely to be trends in US venture in 2023. These factors
will increase the public market’s effect on the index’s pricing.
Kyle Stanford, CAIA
Senior Analyst, US Venture Lead
kyle.stanford@pitchbook.com
3
PitchBook Analyst Note: 2023 US Venture Capital Outlook
Outlook: Series C and D rounds will see the most down rounds, as these
companies are currently the most starved for capital.
Rationale: When we compare the estimated capital demanded by startups to
observed deal value in each quarter, we can track deal activity dislocations
in the market. Relative to historical trends, all stages have seen a massive
dislocation of deal activity starting in Q4 2020, but nowhere is this more
pronounced than the late stage. In Q4 2022, 3.5 times more capital was
demanded than the deal value observed. This could mean that the late stage
became the most overextended during the VC dealmaking frenzy of 2020 and
each deal generates estimates into the future based on historical deal size step-
ups and the distribution of time between rounds at the time of that fundraising. By
reviewing our reported deal value over time, we have determined that we tend to
add 10% of deal value to the most recent quarter due to a reporting and collection
lag. Therefore, we have added 10% of deal value to our reported deal value in the
current quarter only.
We see the biggest growth in capital demand relative to deal size at the late stage
Alex Warfel, CFA
Quantitative Research Analyst
alex.warfel@pitchbook.com
4
PitchBook Analyst Note: 2023 US Venture Capital Outlook
because these companies are large enough to put capital to work in a meaningful
way. Smaller, early-stage companies may not have had the ability to expand
operations significantly in a market like that of 2020 and 2021, when capital was
cheap. However, this operational expansion came with greater ongoing expenses
that required greater funding in the future if the revenue from those operations
could not be converted into profit. When the funding market slowed down in 2022,
startups had to respond with layoffs, capital raises from other sources such as
venture debt, and so on.
Source: PitchBook | Geography: US
*As of December 1, 2022
0.0x
1.0x
2.0x
3.0x
4.0x
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2017 2018 2019 2020 2021 2022*
Early-stage VC Late-stage VC Venture growth
3.5x
2.5x
1.4x
Estimated VC demanded as a multiple of observed deal value by quarter
5
PitchBook Analyst Note: 2023 US Venture Capital Outlook
Outlook: Seed-stage startup valuations and deal sizes will continue their ascent,
reaching new annual highs despite a slowdown in total deal value and count.
Rationale: Seed-stage startups are more insulated from public market volatility
than their early- and late-stage counterparts because they are at the most
nascent stages of the VC lifecycle. Having just raised their first round of
institutional capital, they are farther away from an IPO and can bide their time
until paths to liquidity reopen. In recent years, and more prominently following
the 2022 economic downturn, investors traditionally allocating capital to late-
stage startups have moved upstream, targeting the earlier stage to capture
larger returns and secure access to promising startups. Dramatic reductions
in the cost to start and scale businesses, the prolonged time between startup
foundings and seed rounds, and the expansion of participants at the seed stage
have contributed to the development of a more robust pre-seed market. This
has led to larger capital raises and valuations at the seed stage that are more in
line with historical metrics associated with Series A or later rounds. Moreover,
the economic downturn could cause investors to encourage seed startups to
raise additional capital, which would extend their runway past the 18-month
standard and translate to larger deal sizes at this stage.
Risks: The frozen IPO market has diverted investment dollars traditionally
committed to late-stage companies to younger startups. Should market
conditions improve and paths to liquidity return, seed-stage deal metrics may
stagnate or fall in response to larger check writers returning to their original
investment strategies. Seed-stage startups have a higher rate of failure and thus
higher investment risk; this could cause GPs to be wary of allowing deal sizes
and valuations to continue increasing because more of their portfolios could
be exposed to this risk. Additionally, GPs could exercise stricter due diligence
of startups and limit seed-stage deal-metric growth in order to mitigate the
recent years’ relaxed due diligence protocols, which have led to unsustainable
valuations hurting late-stage startups and forcing them to consider marking
down their portfolios.
Seed-stage startups are more mature than they have ever been. With a median of 2.4
years since founding, they are nearly double the age of seed-stage startups a decade
ago. Their maturity has contributed to the median seed-stage deal size, valuation, and
step-up YTD of $2.8 million, $10.5 million, and 1.9x, respectively, surpassing 2021’s
record-high figures. Amid the tepid public market conditions and the Federal Reserve’s
(the Fed’s) monetary tightening, seed deal metrics have increased QoQ.
