Is the Venture Capital Market on the Verge of a Decline?

As the public markets continue to wane, PitchBook expects nontraditional investors to loosen their grip on VC deals.

Illustration by II

Illustration by II

Against a backdrop of declining public market performance, venture capital deal sizes and valuations have begun to erode.

A preliminary look at the PitchBook-NVCA Venture Monitor report for the first quarter of 2022, scheduled to be released next week, shows that poor public market performance is affecting venture-backed companies that have close ties to the public market and are seeking to raise capital.

Researchers and senior PitchBook analysts Cameron Stanfill and Kyle Stanford found that poor public market performance in the first part of the year has led to an almost complete halt in IPOs of VC-backed startups during the first three months of 2022. “Tech stocks have had a difficult time in the public markets,” Stanford told Institutional Investor. “Late-stage venture-backed companies are going to have their valuations tied to comparable companies in the public market.”

As an example, Stanford pointed to fintech stocks. If these stocks are underperforming, late-stage venture-backed fintech companies that are looking to go public will have a tough time raising extra capital at a valuation that works for them. “If they do decide to go public, they’re going into a market where their competitors — or comparable companies — are doing very poorly, so they’ll have a tough time generating interest from public investors,” he said.

In addition to volatile public markets, the U.S. venture market has experienced other headwinds in the first part of the year, including anticipated interest rate hikes from the Federal Reserve and the war between Russia and the Ukraine. PitchBook found that these issues are another reason why VC deal sizes have begun to drop. Specifically, the company found that average U.S. VC pre-valuations in the late stage dropped from $731.6 million in 2021 to $572 million in the first quarter of 2022.


PitchBook also expects nontraditional investors, who are often heavily involved in late-stage VC investments, to pull back, which would have a direct impact on VC deal values. Stanford said that large nontraditional investors, such as T. Rowe Price or Fidelity, are heavily active in large-deal financing, including mega-deals, which are defined as any deal over $100 million.

“Last year, nontraditional participation was at an all-time high,” Stanford said. “If those crossover investors — the hedge funds [and] mutual funds — need to slow down the pace of their dealmaking ventures, [we’re] not going to see as many of those $500 million deals, which is going to have a major impact on the deal value,” Stanford said.

Some parts of the venture market were able to withstand this year’s first-quarter headwinds. Fundraising, for example, has so far been just as strong this year as it has been in recent record years — in the first quarter of 2022, total VC fundraising passed the $70 billion mark in commitments. But Stanford said that some of those fundraising dollars can be attributed to momentum from 2021, when funds were raising venture capital in a big way.

“Last year, allocators were putting a lot of money into VC,” Stanford said. “Many of the funds we saw close in Q1 probably got a lot of their commitments signed in 2021.” Additionally, nearly 200 VC mega-deals were completed in the first quarter. However, Stanford said that PitchBook expects this number to decrease in the second and third quarters.