State of the Venture Capital Industry

The tide turned in 2022

We have become accustomed to seeing statistics move up and to the right year after year, but 2022 was a very different year for the US venture capital market. Perhaps we became desensitized to the rapid pace of dealmaking and the steep valuations given to companies, especially later stage assets. In 2022, most of those statistics reversed course and the easy capital retrenched, in part due to tourist capital and crossover funds finding more value in beaten-down public markets.

With the macroeconomic backdrop of the war in Ukraine, ongoing global supply chain issues, rising interest rates and inflation, and a looming recession, the economic bubble finally burst and we were confronted with the resulting fallout.

Investors pumped the brakes on new financings, turning their focus to existing portfolios. They counseled founders not to raise capital unless it was absolutely necessary, to extend cash runways through layoffs and other cost reductions, and to take a less aggressive stance by pursuing more efficient methods of growth. While there was some M&A activity in 2022, the IPO window that was open wide in 2021 had firmly shut.

“Capital flipped from abundant to scarce, valuations swung from generous to stingy, and many businesses selling into the startup ecosystem were faced with the deterioration of their customer base. The mettle of all entrepreneurs is under tension, and now, more than any moment since we have practiced venture investing, it is critical that founders are building ‘for the right reasons.’”

Zigg Capital

On a positive note, we returned to a more rational deal environment, we saw less rash “FOMO”-fueled behavior, and pre-money valuations began to recede.

Passionate early-stage founders with big ideas still got funded, and later-stage companies with solid growth and sound fundamentals were able to raise impressive rounds. 2022 was not all doom and gloom. Many investors ended the year thinking that the next several vintage years could be some of the best ever, given the shift in market conditions and the resilience of innovation.

“In many ways, we feel bullish about the future potential. The founders who are starting companies now, in the face of these headwinds, have a different caliber and determination than many who started them in the frenzy. It’s also our view that in general, change favors startups, and as markets are inevitably shuffled, opportunities will open up.”

Jack Altman, Jack Altman Fund

Fundraising

A bright spot amidst the turmoil

Investing

Early-stage investing holds strong

TREND

Trend: Blockchain should emerge stronger amidst disruption and caution

VALUATIONS

Later stages come back to earth

Exits

Nearing zero activity

PERFORMANCE

Performance dips after historical highs

Conclusion

We’ll keep on keepin’ on