Venture capital funding in the United States has experienced a significant decline in recent years. The third quarter saw the lowest level of venture deal value in six years and the lowest deal count in three years, according to the Venture Monitor report from the National Venture Capital Association. The report highlights the economic turbulence of the past 18 months, which has affected VC activity. Despite this, the report suggests that VC remains well positioned to navigate challenging times. However, caution among investors can be observed amidst geopolitical concerns and stock market volatility. The uncertain market conditions have led to fewer deals and increased stress within the VC ecosystem.
The report indicates several challenges faced by investors and founders. Companies are resorting to bridge, continuation, or down rounds, striving for stability and cash flow. Inside rounds have reached multiyear highs, while rounds with new lead investors obtaining board seats are at their lowest point in at least a decade. This reflects the cautious approach taken by stakeholders in response to the current market conditions. However, the ecosystem overall remains well capitalized, and the availability of additional sources of liquidity from federal programs offers some support.
The stock market’s low multiples in price/sales ratios for public companies are resulting in a decrease in initial public offerings (IPOs). The number of companies waiting to go public is estimated to be around 75. While exit activity is expected to be modest in the near future, the potential listings of well-known companies like Stripe, Chime, and Reddit may indicate a more vibrant liquidity environment in the long run. On the other hand, pre-seed and seed deal counts in the U.S. have hit a 12-quarter low, the lowest since 2020. The relative share of pre-seed deals compared to early-stage deals has consistently declined over the past year. In contrast, late-stage and venture-growth deals have remained relatively stable over several quarters. Megadeals over $100 million have also decreased over the past year, accounting for only 48.5% of deal value in Q3, compared to 60% in Q4 2021. Seed deal counts are expected to fall below pre-pandemic levels. The concentration of deals in regional hubs across the U.S. further highlights the challenges faced by entrepreneurs outside these areas.
Female founders encounter particular difficulties in accessing venture capital funding. Q3 exits saw a temporary increase due to IPOs by Instacart and Klaviyo, but exits via mergers present additional regulatory risks. The Federal Trade Commission (FTC) and Department of Justice (DOJ) introduced new guidelines for approving mergers, raising concerns for the National Venture Capital Association (NVCA). The NVCA worries that the guidelines can block small company acquisitions based on theoretical reasons with little grounding in reality. The guidelines may misrepresent nascent firms as “dominant” when they lack monopoly power, hindering potential mergers.
Fundraising for new VC funds reached a nine-year low in 2022. The concentration of fundraising in the hands of the largest funds was notable, with nearly half of all capital committed going to funds valued over $1 billion. Committed capital to funds valued between $100 million and $1 billion showed a sharp increase, comprising almost two-thirds of funds raised in 2023 thus far. Despite the relatively stronger performance of mid-cap funds, emerging managers trying to raise their first funds faced significant challenges in 2023. Established managers received the majority of fundraising, while first-time funds are on track to reach their lowest count in a decade.
Software deals have reached a multiyear low, reflecting the challenges faced by this industry. On the other hand, life sciences investment, while diminished, remains at the highest relative level since 2020. This demonstrates the resilience of the life sciences sector in attracting VC investment, even in the face of overall declining trends.
The Venture Monitor report presents a somber outlook for venture capital funding in the U.S. The decline in deal value and count, coupled with cautious investor sentiments and market volatility, has created a challenging environment for entrepreneurs seeking VC funding. However, the report also highlights the resilience of the VC ecosystem and the potential for stability with the availability of additional liquidity sources. As the market evolves, it remains crucial for stakeholders to navigate these challenges and explore opportunities in emerging sectors and regions.
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