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:

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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.

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Global Performance

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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. 

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• 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. 

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• 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%.  

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Average deal size falls as investors focus on investing in earlier rounds or their existing portfolio.

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• 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