The first quarter of 2023 was bleak for the venture capital and startup sectors, as late-stage deal value declined for the 7th quarter.
The first quarter of 2023 was bleak for the venture capital and startup sectors, as late-stage deal value declined for the seventh straight quarter to just $11.6 billion and exits collapsed altogether, according to the latest report by the National Venture Capital Association and Pitchbook.
Silicon Valley Bank’s collapse was a major, unexpected event that dominated the narrative in March, and the impact of the bank’s failure sent shockwaves as it was at the center of the innovation ecosystem, as it usually supplied bridge loans for startups raising money.
While the impact of the bank’s failure will likely not be immediately visible in the data, and the potential devastation from the event seems to have been largely avoided, it was another unneeded pressure on the market, said Vincent Harrison, an analyst at Pitchbook, in an interview with VentureBeat.
“The first quarter of the year met expectations in terms of following the downward trajectory that we saw in Q4,” Harrison said. “In Q4 2022, we started to see things go down. The expectation for the most part was that things would continue to go down and that pretty much held up. Whether it is fundraising or deal activity or exit activity, everything continued the trend downward.”
He added, “I think everything that happened this quarter meant things were going to be down regardless of what happened with SVB. But again, SVB just exasperated the problems. It just scared a lot of people. The market is very reactive.”
But SVB assisted with capital calls as well, and now that money has likely disappeared from the system as well, Harrison said.
VC investments have fallen consistently over the past year as the market further condenses from the
expansion of 2021, according to the Q1 2023 PitchBook-NVCA Venture Monitor.
Late-stage deal value fell to $11.6 billion as investors shied away from larger deals to preserve capital at a time when cash is short. Just 19 late-stage mega-rounds occurred in the first quarter of 2023, compared with 98 in Q1 2022.
Not only has this widened the funding gap between startups seeking capital and investors willing to provide it, but it has also put downward pressure on deal pricing. In Q1 2023, the median late-stage VC pre-money valuation fell 16.9% from the 2022 full-year figure to $54.0 million, while the average pre-money valuation declined by more than $100 million to $159.1 million, Pitchbook said.
Just $5.8 billion in exit value was closed in Q1. That is less than 1% of the total exit value generated in the record year of 2021. With IPOs unattainable (only 20 public listings occurred in Q1), pressure continues to build within the ecosystem due to the high number of unicorns unable to realize returns for investors, the report said.
“We’re still not out of this. This exit desert is still down,” Harrison said.
The market has been left with inflated valuations built on high multiples from the past couple of years. That means that such companies cannot raise further funding unless they accept “down rounds,” which most investors and startups avoid.
Even though the exit count estimate increased slightly quarter to quarter because of relatively strong
acquisitions, such deals cannot provide the amount of capital needed due to these high valuations.
By the end of the first quarter of 2023, the fundraising momentum of 2021 had all but dried up, with a meager $11.7 billion closed across 99 funds. Capital commitments continued to concentrate in larger-size vehicles, but just two funds closed on $1 billion or more (36 were closed in 2022). The sluggish pace of fundraising for emerging and first-time fund managers could be a precursor to formidable fundraising experiences through the end of the year.
The problems are many. Continued instability abroad, stubborn inflation rates, and several high-profile bank failures contrasted with a bevy of positive macroeconomic indicators spread a plume of anxiety across the markets.
Finance—especially VC—is fundamentally prospective, and when the invisible hand that writes the rules of the market is revising them without warning, investors tend to reduce their activity until they have some visibility. But Pitchbook/NVCA said it would be a mistake to refer to the climate as entirely pessimistic: GDP and employment figures, as well as major stock indexes, were all relatively robust at the end of Q1.
