The report tackles the current situation when it comes to available assets on the market.
Summary:
Get ready for a wild ride, 2022 brought the heat with market volatility, inflation, and Fed action shaking things up! Startups are hungry for cash and VCs are struggling to keep up with the demand. With a 'growth at all cost' mentality and FOMO in full swing, startups are raking in record breaking investments. Buckle up, because the US VC ecosystem is about to hit $80.7 billion in demand!
Below you can find key takeaways from the report:
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- Demand tells us only one side of the story, but understanding the supply of capital clarifies what happened to the VC market. The bid side of the market has shrunk, while the ask side has been overloaded with startups looking to raise their next rounds of funding.
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- In 2021 and 2022, deal value was in line with or above pre-pandemic levels, but demand for capital from startups far exceeded historical levels. VCs are pulling back from dealmaking until a more favorable dealmaking environment comes along.
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- We recently introduced a new stage, venture-growth, which segments companies by their investment characteristics. Venture-growth companies have grown 2.2x more investor-friendly from Q4 2021 to Q4 2022, while early and late stages have grown 7.1x and 6.4x, respectively.
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Venture growth has struggled recently as the IPO markets have frozen, and startups are seeking 67.1% more capital than venture capitalists are currently providing for new deals. The supply and demand of capital imbalance will reverse when public market valuations are more favorable and IPO liquidity increases.
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The above metrics have some caveats. The VC Dealmaking Indicator is difficult to capture deal term data, and the demand for capital estimate is generated using historical data, meaning that the model expects the present to resemble the past.
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Companies at this stage may be able to secure funding from existing investors at flat valuations or with more protections for investors.
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During the pandemic, the venture-growth stage became more investor-friendly, but now it is at a relative high point of 56.9. This represents a change of 2.2x more investor-friendliness from the lowest reading of 17.7 in Q4 2021.
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- The late stage is the most capital-starved in terms of unfilled demand, and we expect this stage to see the most down rounds as startups return to reality when seeking funding.
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The early stage has fared slightly better than the other stages, but its funding deficit is the smallest. This is partially because it didn't receive as extreme of a markup as the other stages, and also because it takes five years to exit.
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The late stage is becoming more investor-friendly as the supply-demand imbalance favors venture capitalists with dry powder. The time between rounds is also creeping up, which is a markedly investor-friendly attribute.
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The early stage is the only venture stage with a dealmaking indicator level that is still more startup-friendly than its pre-pandemic level, but it is still valuing companies using step-ups greater than the other two stages.
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Early-stage companies return to the funding market the most, but are further from profitability than the other stages.
Reference:
- https://files.pitchbook.com/website/files/pdf/Q1_2023_PitchBook_Analyst_Note_When_Dry_Powder_Stays_Dry.pdf
- https://www.fidelity.com.sg/beginners/what-is-volatility/market-volatility#:~:text=Volatility%20is%20an%20investment%20term,to%20sudden%20price%20rises%20too.