6 Additional Takeaways from the Latest Venture Monitor

The second quarter of 2022 brought a series of new stories to the U.S. venture capital (VC) ecosystem. The initial narratives around the quarter revolved around inflation concerns and the tightening monetary environment. However, as the first half of the year came to an end, insights garnered from the Q2 2022 PitchBook-NVCA Venture Monitor data and interviews with members of the VC community have painted a more nuanced picture.

Q2 2022 deal value and count are down from Q1 as well as the all-time records of 2021. However, both metrics are at or above quarterly medians when compared to the last five years. Furthermore, as the market becomes more diverse – with record numbers of new managers, corporate venture capital funds, and crossover investors – it is now easier for capital to flow in and out of the market than ever before. This means that with an uncertain market environment, investors and founders will need to focus on value creation and capital efficiency to continue to fuel the nation’s innovation ecosystem.

Key Takeaways

2021 Was A Remarkable Year and Perhaps an Unsustainable Benchmark: While year-on-year quarterly deal activity is down across most sectors in Q2 2022, it is up across most sectors when compared to the Q2 median over the last five years. While the VC market is undergoing a correction, it’s clear that the record-setting numbers of 2021 are not the new normal.

The Exit Environment Is Mixed: With 8 VC-backed IPOs completed over the course of Q2, public listings are at a five-year low. In comparison, buyout and acquisition numbers are down somewhat from the heights of 2021 but are on par with the three-year historical median. The closure of the IPO window is concerning because valuation readjustments are already impacting the private markets, and venture-backed companies are important to the health of U.S. public markets given their historical outsized proportion of market capitalization and R&D spending.

The Environment for Seed Funding Remains Strong: Q2 saw 1,104 seed deals with an overall value of $3.9 billion. While the number of deals is slightly below the five-year quarterly median, that number is buoyed by the exceptionally strong activity of 2021 (which averaged over 1,200 deals per quarter). When 2021 is excluded as an outlier, Q2 2022 is well above the quarterly average of 972 deals. While numerous investors interviewed agreed that allocations to seed deals were most likely made over the prior quarters before they closed in Q2 2022, there was broad agreement that the tightening monetary environment has had a limited effect on seed stage deals thus far.

Corporate Venture Capital (CVC) and Crossover Investors are an increasingly Significant Presence in the Venture Ecosystem: While there has been modest pull-back, CVC and crossover investor activity from Q1 it is up compared to the three-year mean with a 10% increase in the number of deals and a 34% increase in the total investment value. CVCs and crossover investors have significant diversity in the strategies available to them and there’s uncertainty regarding the impact their continued participation in the venture ecosystem will have.

Investors and Founders Are Focusing on Value: The prospect of a tighter money environment has investors focusing on their most promising portfolio companies and making sure they are funded through to profitability. Hiring is becoming increasingly tight, with review of new job listings by multiple levels of management, or outright freezes and retracted offers happening in companies of all sizes. Investors are pushing founders to cut costs and optimize for cash inside portfolio companies.

Overall Deal Activity Remains Robust: Much has been made of the challenges facing the VC industry, but when compared to historical trends, the first half of 2022 resembles a reversion to the historical mean rather than an epochal shift. In addition, the ecosystem of investors, now including established funds, first-time funds, CVCs, and crossover investors, has expanded rapidly in recent years. This more diverse ecosystem has also had several years of strong fundraising and has amassed a record $290 billion to help withstand potential headwinds.

Q2 2022 brought a variety of changes and challenges to the U.S. venture capital ecosystem. Investors and founders are going to need to work together to build the next generation of innovative companies in a financial and geopolitical environment which is unprecedented in the careers of most current market participants. We will be spending the quarter tracking how the industry is adjusting to these changes and how venture capital is working to strengthen the nation’s innovation ecosystem.

If you have any tips about surprising venture-backed companies flourishing in unusual places, let us know at research@NVCA.org