US VC Deals Sink Across The Board In Q1 – PitchBook

Venture capital (VC) activity in the US dropped across all stages and sectors during the first quarter of 2023. That’s according to financial data business PitchBook.

It notes a wide range of factors that spooked investors in recent months, explaining that “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.”

On the one hand, PitchBook says that it would be wrong to label the investing climate as pessimistic. It points to the strength of growth and employment data at the end of the first quarter, as well as the solid performance of major stock indices.

But it adds that “the market’s lack of confidence is obvious, and while symptoms of a healthy VC market are clear, the mechanisms of action required to restore it are not as well understood.”

Fundraising Splutters

PitchBook says that “the fundraising momentum of 2021 had all but dried up” by the end of quarter one. Just $11.7 billion was closed across 99 funds, it notes, down significantly from the $71 billion raised in the corresponding 2022 quarter.

VC commitments remained concentrated in larger funds during the first quarter, the research house notes. In fact, it says that commitments to funds led by established managers hit record highs.

At the opposite end of the scale, fundraising for emerging and first-time fund managers was “sluggish” during the period, PitchBook notes. But it suggests that weak first-quarter fundraising “could be a precursor to formidable fundraising experiences through the end of the year.”

Late-stage Deals Plummet

Breaking VC deals down by stage, PitchBook says that the value of funding for late-stage deals “took a nosedive” during the first quarter. This dropped to $11.6 billion in the period, representing the seventh successive quarterly decline.

Total value – which was distributed across 1,105 deals – also dropped below $12 billion for the first time since the final quarter of 2017, the firm added.

A frozen exit environment, and a subsequent liquidity crunch, mean that VC investors have shied away from larger deals in order to preserve capital. And as a result just 19 ‘mega deals’ happened in the first quarter of 2023, down markedly from 98 in the same period last year.

PitchBook says that “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.”

The median late-stage VC pre-money valuation dropped 16.9% in the first quarter from the 2022 full-year figure, the firm notes. This came in at to $54 million. In addition, the average pre-money valuation sunk by more than $120 million over the same period, to $159.1 million.

Deals Drop Elsewhere

At the angel and seed fundraising stages, total deal value fell to $3.3 billion. This was down 53.1% year on year and was spread across some 1,396 deals.

Angel and seed activity dropped to 34% of all deals made during quarter one, PitchBook notes. Funding at these stages historically accounts for around 47% of total deals.

As well as dropping from 38.4% during the last quarter of 2022, angel and seed investment was the smallest share of total venture capital investment for a decade.

Meanwhile, deal value for early-stage VC came in at $9.6 billion and was spread across some 1,197 deals. This marked six successive quarters of deal value decline and was lowest deal value since quarter two of 2020.

PitchBook comments that the drop in early-stage deal sizes is “one of the most striking observations thus far.” The median deal size in the first quarter tanked to $6.2 million, down from 2022’s full-year median of $8.8 million.

“Best Days Are Yet To Come”

PitchBook notes that VC investment is a long-term endeavour, and that there are multiple dangers for the industry.

It says that the Covid-19 crisis, Russia’s invasion of Ukraine, and a U-turn on globalisation “have upended decades of received wisdom and thrown a mature business cycle into chaos.”

It says, too, that “high interest rates, the failures of Silicon Valley and Signature Banks, the possibility of government default, increased venture debt, and unprecedentedly onerous new regulations being proposed by the Securities and Exchange Commission are all potential pitfalls.”

Yet the company also says that opportunities also exist for investors today. It comments that “more realistic valuations, combined with a market awash in talent and new government programs designed to assist company formation in high-growth strategic industries, are all positive signs.”

It adds that “if investors can meet the changing market with the right mix of diligence, patience, and optimism, then venture capital’s best days are yet to come.”