State of Venture in 2022
After more than 13 years, the zero-interest-rate policy most of the world became accustomed to has ended. With the vast majority of the world tackling sticky inflation and climbing rates, a focus on near-term cash flow has become the centre of the conversation as startups prepare for a recession. In response, the risk appetite of U.S. VC Funds has shrunk dramatically, with the amount of invested capital falling more than 60% in Q4'22 compared to the same period in 2021. Still, looking over the last 50+ years of success stories, the fact is that successful startups were created during every part of the cycle, even more so during periods of economic turmoil.
Why rising rates can be a good thing for ‘high-quality’ startups:
Rising rates force investors to concentrate capital on the companies they truly believe in -companies that have talent, create value and embrace change. Companies which can out-manoeuvre competition in tricky markets and embrace the establishment changes (i.e., move from growth at all costs to building sustainable business models) will witness competition weaken and talent become available allowing high-quality companies to reap the rewards of the inefficient decisions from their rivals.
Venture capital activity in the second half, and especially in the last quarter, didn’t hold up as well as it did during the first six months of the year.
2022 venture funding slides 35% YoY to $415.1B.
- Global Venture Funding fell every quarter in 2022 with Q4’22 funding in line with Q2‘20. The funding slowdown was especially severe in the year’s second half, with Q4’22 funding clocking in at $65.9B — down 64% YoY to return to pre-Covid levels.
- 2022 was the second-best year on record for venture funding due to the stronger performance in Q1 & Q2‘22.
The decline in mega-rounds correlated to another trend: the decline in unicorn birth.
Funding for Mega Rounds $100M+ is Cut by nearly 50% YoY. Quarterly mega-rounds are at a 10-quarter low.
- Mega Rounds account for nearly 36% of all funding – the lowest level in nearly eight years.
Unicorn births drop 86% YoY. The US accounts for most of these unicorns at around 30%.
Average deal size falls as investors focus on investing in earlier rounds or their existing portfolio.
Average global deal size falls 32% YoY to $16.8M
- Attributable not only to an increased reluctance to back mega-rounds, but also a relative increase in early-stage deal share
- Despite the average deal round across all stages falling, the median deal value at seed, Series A, Series B, and Series C are up this year compared to 2021
Early Stage deal count represents >60% of total deal count
Median deal size for late-stage rounds drops by 45% YoY in 2022
Source: CB Insights
US Venture Market
2022’s Venture Market was propped up by the strong performance of the US in the first two quarters of 2022. However, the drop off post-summer has meant that levels are now back to 2020.
US Venture funding fell 37% YoY to $198.4B.
- The US remains 50% of global Venture Funding, with Asia in 2nd place and Europe in 3rd.
- Silicon Valley quarterly funding sinks below $10B for the first time since 2018. In terms of total deal value, the Bay Area is at it slowest level since 2012.
- New York funding totals $4.6B in Q4'22, the lowest level since Q2'20
Rest of the World
Only Canada and Africa managed to defy the global funding decline in 2022
European Funding falls drop 17% YoY. Nevertheless, Venture funding fell every single quarter in 2022. Funding levels are now similar to Q4'20.
Median Deal Size dips across all regions except Canada and Africa.
Africa seems to defy the global venture funding decline, with its start-ups raising almost double the period of last year. VC’s are hinting that the slowdown we saw in developed markets will sustain in 2023.
- Despite this growth, Africa did not welcome any Unicorns in 2022.
The correction has hit all sectors, but none have felt the correction as much as Digital Health & Retail
Fintech funding drops 46% YoY, with Q4 figures in line with 2020 data.
- US Based FinTechs account for 36% of all fintech funding. Then it is Europe (26%) and Asia (25%).
The US maintains the lead in global fintech deal share, and Europe jumps into second place. Only five unicorns were minted in Q4'22 compared to 39 minted in Q4'21.
Retail Tech Funding falls to its lowest level in five years. Asia holds the lead in Retail tech
Quarterly digital health funding and deals fall to 5-year lows in Q4’22.
- Digital health was the only sector where both funding and deals in 2022 dropped below 2020 levels.
Climate Tech and AI investments are expected to remain strong in 2023.
Trends to watch in 2023
AI/ ML adoption will continue rise
We will see more low-code/ no-code app development platforms
More organisations will host resources in multi-cloud environments
Remote work tools will continue to improve
Cloud adoption will increase in formerly resistant sectors e.g. US army just said it will start using Google Workspaces for personal operations