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Posted Jul 14, 2022

The state of venture capital - Q2 update

Eugene Tetlow

State of Venture Capital Q223 blog Hero

In the first two quarters of 2021 alone, the value of U.S. Venture Capital (VC) exits set a new annual record at $372.2 billion. According to data released in the Q2 2022 PitchBook-NVCA Venture Monitor First Look, the story of the first half of 2022 is starkly different. Exit values at the end of Q2 2022 are down a staggering 86.9% compared to this time last year at only $48.8B. At the current rate, 2022 is on course to have its worst exit year since 2016. A number of factors have contributed to this downward trend, including the prolonged war in Ukraine, struggling public equity markets, high inflation, continued supply chain issues, and the rapid rate at which the federal government has raised interest rates.

VC 1

A strong year ahead

Despite these worrying headwinds, U.S. VC fundraising continues to report strong numbers, with 2022 on course to easily beat the previous record of $138.9B set in 2021. Indeed, the $121.5B raised in the first two quarters of 2022 is an increase of 64% vs the $74.1B raised in the same period of 2021. This indicates that investors see opportunities with decreasing private company valuations and are optimistic about the long-term value of VC-backed start-ups. Another positive indication of the long-term health of the venture industry is the upward trend in the average fund size. The average fund size raised in the first two quarters of 2022 is $292.8M – more than double the average fund size of 2021.

VC 2

The final piece of data released in Pitchbook’s First Look focuses on US VC deal activity. With 9,421 deals closed in the first two quarters, 2022 looks set to beat the 2021CY record of 17,637 deals. With 2022 company valuations lower than the record highs of 2021, the average deal value is down, but still far higher than 2020 and prior years.

VC 3

Saving is a safe bet

Moving away from the numbers, VC fund managers are advising their portfolio companies to keep enough money in the bank to last until 2025. For healthy companies who raised money in the lofty valuation year of 2021, this is unlikely to cause too much of an issue if they tighten their purse strings. However, companies who have not raised money for a number of years face the unwanted prospect of a down round and the negative connotations associated with such an event.

To summarize, Venture Capital has not escaped the 2022 financial market downturn, but the continued flow of capital indicates long-term health. The venture space is comparatively still an attractive asset class for investors, especially with the longer investment cycle vs. the public markets. During these turbulent times, it is increasingly important for General Partners (GPs) to cultivate and maintain strong relationships with the Limited Partner (LP) community. In a recent Juniper Square survey, 92% of GPs agreed that transparency and visibility into partnership information is a critical factor in successful investment partnerships with LPs. Indeed, with LPs allocating more assets to fewer funds, the competition to attract top LP money is higher than ever.

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To learn more read our latest blog, It's time to reimagine private markets, and download our newest 2022 Investment Partnerships Survey report.