U.S. venture capital fundraising held strong through the second quarter of 2022, but the tide may be about to turn.
Amid rising interest rates and inflation, declining equity markets, and geopolitical turmoil, the U.S. VC market maintained its fundraising numbers, according to a first look at the second-quarter 2022 PitchBook-NVCA venture monitor shown to Institutional Investor. U.S. VC fundraising activity has already topped $120 billion for a second consecutive year, a trend that PitchBook attributes largely to momentum from 2021. In the first half of 2022, managers closed 405 funds worth a total of $121.5 billion.
But looking ahead, PitchBook analyst Kyle Stanford expects a slowdown. “I don’t think right now that many funds are going to be entering the fundraising market,” he said.
According to Stanford, one likely deterrent of VC fundraising is the recent drop-off in IPO activity. In the first half of 2022, VC exit value reached a total of $48.8 billion, with an estimated exit count of 831 — a massive fall from 2021’s $777.4 billion total exit value. “This closed window is troublesome for the venture market, because a lot of that capital won’t get recycled back into VC funds,” Stanford said.
Much like the first quarter of 2022, the second quarter was characterized by a “complete lack of traditional IPOs,” the report said. In contrast, 86 percent of 2021’s record exit value was derived from IPOs. “This activity is most concerning for the billion-dollar exits, as public listings have been the main source of liquidity for that cohort of companies,” the report said.
Other trends analyzed in the PitchBook-NVCA report included VC deal counts and deal value. According to the report, deal counts have remained high across all stages, which Stanford and his colleagues Cameron Stanfill and Max Navas attributed to momentum from the last six months.
However, deal value declined across all stages in the second quarter of 2022. In 2021, deal value reached a cumulative total of $341.5 billion, a number that PitchBook doesn’t expect 2022’s values to match. “The outsized deals that became a theme of 2021 are not being completed, as investors take a more cautious approach to the largest deals in the market,” the report said.
In fact, the second quarter of 2022 saw less than $77 billion in completed deal value, making it the first quarter since the fourth quarter of 2020 to see such low deal values. PitchBook analysts expect these trends to continue until the broader markets stabilize.
“At the same time, [deal value] is higher than any other quarterly deal value before 2021,” Stanford told II. “So it’s much lower than what we saw in Q4 and Q3 of last year and even Q1 of this year, but it’s still extremely high.”
Stanford said that deal value in 2021 was driven by the top of the market — the largest deals were the likes of SpaceX and Stripe, both of which raised billions of capital in single rounds. But the really large deals seen last year aren’t going through this year. Instead, Stanford said investors are playing it safe.
“It also has to do with timing,” he said. “The nontraditional investors, especially those hedge funds and mutual funds that have hundreds of billions of dollars to invest, are necessary for some of those extra-large deals to occur. And those investors, right now, are also dealing with huge hits to their public portfolios. They’re trying to make sure that they’re set up to continue their strategy and probably not looking to invest a huge chunk and billions of dollars in a single investment.”
Still, Stanford said the core of the VC market is fairly strong, adding that the presence of lot of dry powder, investors, and capital means that the U.S. VC market is in a strong position for a stable market environment. “I think everyone’s just looking for a little more certainty in terms of interest rates and [the] public markets,” he said.
The full PitchBook-NVCA Venture monitor will be released shortly after the first look is published.