U.S. VC investments and exits plummeted in 2022 | NVCA

The deal depend in 2022 for the complete 12 months was 15,852, down 14% from 18,521 in 2021. And deal worth was $238.3 billion, down 30% from $344.7 billion a 12 months earlier, based on a report by Pitchbook and the National Venture Capital Association (NVCA).

U.S. VC exit exercise was 1,208 offers valued at $71.4 billion, down dramatically from 1,925 offers valued at $753.2 billion a 12 months earlier

With every quarter the deal exercise declined and that might foreshadow a slide in 2023, the report mentioned.

On an annual foundation, angel- and seed-stage deal exercise remained comparatively resilient in 2022, with $21.0 billion invested throughout an estimated 7,261 offers. Nevertheless, the 4 consecutive quarters of declining deal counts may foreshadow a continued slide in 2023. Seed-stage deal sizes and pre-money valuations demonstrated notable development over the 2021 figures due in half to a lot of actively investing micro-funds in addition to the participation of nontraditional and crossover buyers.

Ought to the financial downturn proceed, the NVCA expects this stage to begin to really feel stress as a result of declining deal exercise and investor demand in the early and late levels.

Nontraditional buyers are slowing their capital deployment to VC amid much less enticing danger/return profiles. Relative to 2021, the upside potential for the VC asset class declined considerably in 2022, which turned many buyers away from the house. As such, simply $24.1 billion in deal worth concerned nontraditional buyers in This fall— the bottom quarterly worth in three years. Not solely are we seeing decrease deal worth, however we’re additionally seeing fewer nontraditional members inside the enterprise ecosystem.

Exit exercise continued its steep descent in 2022, with simply $71.4 billion in whole exit worth generated—the primary time this determine has dipped under $100 billion since 2016. Public exits of VC-backed corporations have slowed to nearly nonexistent ranges, with simply 14 public listings occurring in This fall, demonstrating how drastically institutional-investor urge for food has been affected by rising rates of interest and unstable macroeconomic elements.

Acquisition exercise has additionally declined considerably; This fall posted roughly $763 million in whole acquisition deal worth, the primary time we now have seen this quarterly whole fall under $1 billion in greater than a decade.

VCs nonetheless raised a document $162.6 billion throughout 767 funds, hitting a document for the second straight 12 months exceeding $150 billion.

The 12 months noticed an growing quantity of capital concentrated in larger-sized funds led by skilled
managers inside the Bay Space and New York VC ecosystems. Regardless of this capital focus, capital raised by rising managers led to the second-largest annual determine on document, and a number of middle-market ecosystems sustained or elevated their fundraising exercise in contrast with the prior 12 months.

In December, the Morningstar PitchBook US Unicorn Index mentioned it’s going to present a unfavorable return from January 1, 2023 by way of December 31, 2023. It predicted Sequence C and D rounds would see essentially the most down rounds, as these corporations are presently essentially the most starved for capital.

It famous seed-stage startup valuations and deal sizes will proceed their ascent, reaching new annual highs regardless of a slowdown in whole deal worth and depend. And it mentioned SPAC IPOs and mergers will proceed to say no whereas liquidations will proceed to extend in 2023.

It additionally predicted enterprise development deal worth will fall under $50 billion in the U.S. VC mega-round exercise will fall under 400 offers, hitting a three-year low. And it mentioned U.S. VC fundraising will fall between $120 billion and $130 billion in 2023.
Rationale: As of December 1, 2022, the US Unicorn Index has returned 1.0%
YTD, whereas our VC-Backed IPO Index is down 59.1%. This distinction is because of
a number of elements, not the least of which being that just about 200 unicorns have been
created in the US this 12 months. Nevertheless, the tempo of recent unicorn creation, and the
tempo of unicorn rounds in basic, has fallen precipitously in latest months. In
November, fewer than 10 accomplished rounds resulted in a post-money valuation
of $1.0 billion or extra, properly under the 48 accomplished in January, which noticed the
12 months’s month-to-month excessive. With few new unicorn rounds sustaining the recency
bias towards non-public values, public comparables will impression unicorn pricing
extra, placing downward stress on the index as the general public market stays
depressed.
Dangers: Whereas it continues to look much less seemingly, a public market turnaround would
push the Unicorn Index into constructive territory. Not solely would growing public
comparable costs put upward stress on non-public values, however new unicorns
and new financings for present unicorns would additionally proceed to have a constructive
impression on the index as they’ve in 2022 and 2021.
The Morningstar PitchBook US Unicorn Indexes, which debuted in November, present
perception into the opaque pricing of unicorns, corporations with a post-money valuation
of $1.0 billion or extra. The indexes are calculated each day utilizing the latest non-public
valuations and adjustments in public and non-public comparable corporations.
Arguably crucial piece of the pricing mannequin is the latest valuation
of an organization, pinning the worth of a unicorn to its value upon completion of the spherical.
The additional away from that spherical the corporate will get (there’s a roughly 18-month span
between unicorn rounds), public and non-public comparable corporations more and more impression
the corporate’s valuation.
Once we take a look at the 2022 US index return of 1.0%, the big variety of unicorn rounds
all year long has tied many index constituents to their most up-to-date priced spherical,
most of which have been at a valuation step-up. On the identical time, we now have not but seen a
marked enhance in non-public firm down rounds throughout the financial slowdown.
In 2022, the median step-up for late-stage valuations has been 2.1x—larger than the
median step-up in 2021. Nevertheless, this determine has decreased somewhat rapidly all through
the 12 months. The median late-stage step-up in Q3 2022 was simply 1.8x, indicating that personal
valuation development, which might underpin unicorn valuations, are rising at a a lot
slower price. We count on this pattern to proceed in 2023 as long as the general public market is much less
receptive to high-growth, high-loss corporations, as many unicorns are prone to be seen.
The US Unicorn Index has returned a lot larger than what was seen in the broader
public market or in our VC-Backed IPO Index. Nevertheless, in November simply 9 offers have been
accomplished for a post-money valuation of $1.0 billion or extra. We consider this pattern will
proceed, doubtlessly falling even additional because the stress created by stagnating worth in
the non-public market constrains exercise. We additionally consider that down rounds and additional
slowing of valuation development are prone to be developments in US enterprise in 2023. These elements
will enhance the general public market’s impact on the index’s pricing.

Kyle Stanford, CAIA
Senior Analyst, US Enterprise Lead
kyle.stanford@pitchbook.com

3
PitchBook Analyst Observe: 2023 US Enterprise Capital Outlook

Outlook: Sequence C and D rounds will see essentially the most down rounds, as these
corporations are presently essentially the most starved for capital.
Rationale: Once we examine the estimated capital demanded by startups to
noticed deal worth in every quarter, we will observe deal exercise dislocations
in the market. Relative to historic developments, all levels have seen an enormous
dislocation of deal exercise beginning in This fall 2020, however nowhere is that this extra
pronounced than the late stage. In This fall 2022, 3.5 occasions extra capital was
demanded than the deal worth noticed. This might imply that the late stage
turned essentially the most overextended throughout the VC dealmaking frenzy of 2020 and

2021. As these corporations grapple with the brand new actuality of upper rates of interest
      and stricter deal phrases, they won’t be able to lift at their earlier paces,
      excessive money burn charges, or valuation ranges. Relying on how lengthy it takes for the
      IPO window to open, we might even see these corporations minimize operations considerably
      to extend runway on the expense of short-term development. If or when these
      corporations want further capital from the non-public markets, many should
      increase it at a diminished valuation.
      Dangers: Traders on the capitalization tables of those late-stage corporations
      could not wish to see their very own investments written down and may come in
      to assist these corporations on the final spherical’s valuation to increase the runway
      of the businesses. Further capital offered to an organization to maintain it afloat
      could be higher than a failed enterprise. This incidence might be particularly
      prevalent if 2023 begins off with a closely improved IPO market the place buyers
      can rationalize further capital funding in the event that they see a lightweight on the finish of the
      tunnel. Moreover, buyers that have been anxious to see a chunk of those extremely
      valued corporations may have skimped on due diligence and could have left
      themselves much more uncovered than in regular markets. This might enhance the
      incentive to ship good cash after unhealthy, so to talk.
      Within the chart under, we plot the estimated capital demand by stage over that stage’s
      noticed deal worth. This might be considered the quantity of demand that was
      fulfilled by the market, or a “pace of dealmaking” metric. We will see under that
      corporations in the late stage are essentially the most capital-starved, with a requirement of three.5 occasions
      what was truly fulfilled in 2022. Their estimated capital demand has seen the
      least quantity of assist in phrases of noticed deal exercise.
      We estimate the capital demanded by startups utilizing a bottom-up evaluation the place

every deal generates estimates into the longer term primarily based on historic deal measurement step-
ups and the distribution of time between rounds on the time of that fundraising. By

reviewing our reported deal worth over time, we now have decided that we are likely to
add 10% of deal worth to the latest quarter as a result of a reporting and assortment
lag. Subsequently, we now have added 10% of deal worth to our reported deal worth in the
present quarter solely.
We see the largest development in capital demand relative to deal measurement on the late stage

Alex Warfel, CFA
Quantitative Analysis Analyst
alex.warfel@pitchbook.com

4
PitchBook Analyst Observe: 2023 US Enterprise Capital Outlook

as a result of these corporations are massive sufficient to place capital to work in a significant
approach. Smaller, early-stage corporations could not have had the power to increase
operations considerably in a market like that of 2020 and 2021, when capital was
low cost. Nevertheless, this operational enlargement got here with higher ongoing bills
that required higher funding in the longer term if the income from these operations
couldn’t be transformed into revenue. When the funding market slowed down in 2022,
startups needed to reply with layoffs, capital raises from different sources akin to
enterprise debt, and so on.

Supply: PitchBook | Geography: US
*As of December 1, 2022

0.0x
1.0x
2.0x
3.0x
4.0x

Q1 Q2 Q3 This fall Q1 Q2 Q3 This fall Q1 Q2 Q3 This fall Q1 Q2 Q3 This fall Q1 Q2 Q3 This fall Q1 Q2 Q3 This fall
2017 2018 2019 2020 2021 2022*

Early-stage VC Late-stage VC Enterprise development

3.5x
2.5x
1.4x

Estimated VC demanded as a a number of of noticed deal worth by quarter

5
PitchBook Analyst Observe: 2023 US Enterprise Capital Outlook

Outlook: Seed-stage startup valuations and deal sizes will proceed their ascent,
reaching new annual highs regardless of a slowdown in whole deal worth and depend.
Rationale: Seed-stage startups are extra insulated from public market volatility
than their early- and late-stage counterparts as a result of they’re on the most
nascent levels of the VC lifecycle. Having simply raised their first spherical of
institutional capital, they’re farther away from an IPO and can bide their time
till paths to liquidity reopen. Lately, and extra prominently following

the 2022 financial downturn, buyers historically allocating capital to late-
stage startups have moved upstream, focusing on the sooner stage to seize

bigger returns and safe entry to promising startups. Dramatic reductions
in the fee to begin and scale companies, the extended time between startup
foundings and seed rounds, and the enlargement of members on the seed stage
have contributed to the event of a extra sturdy pre-seed market. This
has led to bigger capital raises and valuations on the seed stage which can be extra in
line with historic metrics related to Sequence A or later rounds. Furthermore,
the financial downturn may trigger buyers to encourage seed startups to
increase further capital, which might lengthen their runway previous the 18-month
normal and translate to bigger deal sizes at this stage.
Dangers: The frozen IPO market has diverted funding {dollars} historically
dedicated to late-stage corporations to youthful startups. Ought to market
situations enhance and paths to liquidity return, seed-stage deal metrics could
stagnate or fall in response to bigger examine writers returning to their unique
funding methods. Seed-stage startups have a better price of failure and thus
larger funding danger; this might trigger GPs to be cautious of permitting deal sizes
and valuations to proceed growing as a result of extra of their portfolios may
be uncovered to this danger. Moreover, GPs may train stricter due diligence
of startups and restrict seed-stage deal-metric development in order to mitigate the
latest years’ relaxed due diligence protocols, which have led to unsustainable
valuations hurting late-stage startups and forcing them to think about marking
down their portfolios.
Seed-stage startups are extra mature than they’ve ever been. With a median of two.4
years since founding, they’re practically double the age of seed-stage startups a decade
in the past. Their maturity has contributed to the median seed-stage deal measurement, valuation, and
step-up YTD of $2.8 million, $10.5 million, and 1.9x, respectively, surpassing 2021’s
record-high figures. Amid the tepid public market situations and the Federal Reserve’s
(the Fed’s) financial tightening, seed deal metrics have elevated QoQ. Q3 noticed a
record-high median deal measurement of $3.3 million, reinforcing this stage’s insulated nature due
to the prolonged time to an IPO.
Additional supporting the prospect of seed-stage development in 2023 is the big variety of
micro-funds (funds with lower than $50 million in capital commitments) closed in latest
years. Enterprise funds usually make their investments over a interval of three to 5
years, so we now have examined the micro-fund fundraising exercise over the past decade,
breaking it into five-year intervals. Within the five-year interval from 2018 to 2022, 1,770
micro-funds have been closed, amassing $24.4 billion in capital commitments. Within the
five-year interval beginning in 2013, 1,280 micro-funds have been closed with simply $15.6 billion in
commitments. The growing quantities of capital allotted to micro-funds in addition to the

Max Navas
Analyst, Enterprise Capital
max.navas@pitchbook.com

6
PitchBook Analyst Observe: 2023 US Enterprise Capital Outlook

variety of micro-funds competing for offers have bolstered seed-stage deal metrics in
latest years. The micro-funds closed from 2013 to 2017 largely contributed to the 2018
median seed-stage deal measurement and pre-money valuation of $1.8 million and $6.0 million,
respectively. The document highs set by seed-stage metrics in 2022 are due in half to the
enlargement of micro-fund exercise over the past 5 years, and in consequence we will assume
that there will probably be a wholesome variety of micro-funds actively investing on the seed stage in
the approaching 12 months.
Conventional late-stage buyers additionally play a big function in the expansion of seed deal
metrics. Lately we now have seen skilled managers akin to Tiger World,
Greylock Companions, and Andreessen Horowitz decide to investing or elevating $1 billion,
$500 million, and $400 million, respectively, to again founders on the seed stage.1,2,3
The final want for larger-size funds to put in writing bigger checks in order to take care of their
anticipated return profiles will assist the expansion of seed-stage deal metrics in the
coming 12 months.
Along with late-stage enterprise capitalists launching seed-stage funds, we now have additionally
seen bigger enterprise capitalists enhance their participation in seed-stage offers and
driving up the median deal measurement. Utilizing PitchBook’s knowledge, we examined the seed-stage
funding exercise of Accel, Andreessen Horowitz, Greylock Companions, Intel Capital,
Khosla Ventures, Kleiner Perkins, Lightspeed Enterprise Companions, and Sequoia Capital
between 2020 and 2022 and discovered that the collective participated in 154 seed-stage
investments in 2020 and had already made 208 investments by way of mid-December of

2022. The subset of 2020 seed investments had a median deal measurement of $4.0 million, properly
      forward of the identical 12 months’s general median seed-stage deal measurement of $2.0 million. By
      mid-December of 2022, the median deal measurement had elevated to $6.4 million, additionally properly
      forward of the general median seed-stage deal measurement of $2.8 million. This exercise lends itself
      to our bullish potential of seed-stage deal-metric development in the next 12 months.

1: “Tiger Global Partners Commit $1 Billion for Early-Stage Tech Funds,” The Data, Berber Jin, March 7, 2022.
2: “Greylock Raises $500M for Seeds,” Greylock Views, September 21, 2021.
3: “Introducing a16z’s Seed Fund,” Andreessen Horowitz, August 27, 2021.

Supply: PitchBook | Geography: US
*As of September 30, 2022

$0
$2
$4
$6
$8
$10

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022*

Prime and backside quartile vary Prime decile Median Backside decile Common

Seed deal worth ($M) dispersion

7
PitchBook Analyst Observe: 2023 US Enterprise Capital Outlook

Outlook: SPAC IPOs and mergers will proceed to say no whereas liquidations will
proceed to extend in 2023.
Rationale: Elevated market volatility has dramatically depressed valuations
in each public and non-public markets and has successfully halted public listings
by way of 2022. This impression has been noticeable not just for conventional IPOs
but additionally for corporations seeking to go public by way of a SPAC. Rising rates of interest,
which impression client shopping for and borrowing energy and thus earnings for
corporations, have challenged the sky-high valuation multiples of 2020 and 2021.
Moreover, growing regulatory scrutiny has negatively affected the first
worth propositions that SPACs supply to personal corporations, akin to the power to
attain public markets sooner than a standard IPO. These elements, amongst others,
have resulted in a pointy decline in SPAC issuance and mixture exercise and
in many circumstances have led to SPAC dissolution and capital returning to buyers.
We count on these developments to be a driving theme in 2023 as turbulent market
situations proceed to dampen investor and non-public firm curiosity in SPAC
autos.
Dangers: Going public by way of a SPAC can nonetheless be a lovely possibility for some
non-public corporations, and given the big variety of SPACs which have but to seek out
an acquisition goal, it’s potential that we’ll see an elevated variety of
mergers in 2023. As identified in our newest US VC Valuations Report, deal
worth and depend have decreased considerably for a lot of late-stage corporations
and unicorns, demonstrating an issue to lift capital in the non-public market.
Accessing public capital by way of present SPAC autos might be a possible path to
funding given IPOs have been practically nonexistent this previous 12 months, although there
will definitely be challenges alongside the best way.
US SPAC exercise has decreased considerably in 2022 amid unstable public markets, with
simply 78 SPAC mergers totaling $38.2 billion YTD. Our group’s SPAC analysis be aware from
Q3 2022 observes that outdoors of the SPAC spike in This fall 2021, it is a continuation of the
pattern we now have seen because the finish of Q1 2021. Certainly, SPAC formations are additionally down
with simply 69 SPAC IPOs noticed this 12 months, which is the bottom annual whole we now have seen
since 2019. Given the propensity for SPAC favorability to coincide with constructive market
efficiency, we count on these figures to proceed to say no as we head into 2023.
Regulatory and authorized headwinds have additionally contributed to the SPAC decline; most notably,
in Q3 2022, President Biden signed the Inflation Discount Act of 2022 into regulation. The
act included a nondeductible 1% excise tax on the repurchase of company inventory by a
publicly traded US company after December 31, 2022. This excise tax will apply to any
redemption by a US-domiciled SPAC, consequently incentivizing sponsors with no viable
goal in sight to shut store earlier than the 12 months’s finish. Now we have already noticed this pattern
as a number of high-profile SPACs have liquidated this 12 months, together with two from Chamath
Palihapitiya’s funding agency Social Capital. With greater than 450 SPACs presently on
the market with a merger deadline in 2023, half of which with deadlines in Q1 2023, we
count on a big enhance in the variety of SPAC liquidations by the tip of Q1 2023 as
buyers search to recoup their capital and make investments in asset courses higher suited to navigate
the present market atmosphere.
Moreover, public market efficiency of corporations which have gone public by way of SPACs

Vincent Harrison
Analyst, Enterprise Capital
vincent.harrison@pitchbook.com

8
PitchBook Analyst Observe: 2023 US Enterprise Capital Outlook

will play a task in influencing investor urge for food. Sadly, corporations which have
managed to go public by way of the SPAC route have been particularly battered by turbulent
market situations; on the time of this writing, PitchBook’s DeSPAC Index reveals a -64.5%
YTD return for public corporations which have gone the SPAC route, in contrast with -17.3%
and -29.6% YTD returns for the S&P 500 and Nasdaq, respectively. Whereas not an ideal
proxy for comparability, this sizable distinction, amongst different elements, has curbed SPAC
formation and fundraising. We count on SPAC formation to proceed its decline properly into
2023, contemplating not solely underperformance relative to main public index returns however
additionally growing regulatory scrutiny and general market volatility. Moreover, of the extra
than 450 SPACs nonetheless seeking to strike a deal, we count on greater than 50% to liquidate and
return money to buyers in 2023.

Supply: PitchBook | Geography: US
*As of November 23, 2022

Supply: PitchBook | Geography: US
*As of November 25, 2022

$0.2 $0.8 $1.5 $2.9 $1.8 $7.6 $9.4 $15.9

$87.7 $166.0
10 7 $13.4 11 17 9 29 37 54

229
556

69

0
100
200
300
400
500
600

$0
$50
$100
$150
$200

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022*

Mixture publish worth ($B) Deal depend

0%
20%
40%
60%
80%
100%
120%

Dec 2021 Jan 2022 Feb 2022 Mar 2022 Apr 2022 Could 2022 Jun 2022 Jul 2022 Aug 2022 Sep 2022 Oct 2022 Nov 2022*

DeSPAC Index S&P 500 Nasdaq

SPAC IPO exercise

DeSPAC Index versus public market indexes return

9
PitchBook Analyst Observe: 2023 US Enterprise Capital Outlook

Outlook: Enterprise development deal worth will fall under $50 billion in the US.
Rationale: Our enterprise development dataset showcases the newest stage of VC and
might be considered a pre-IPO stage of funding. Enterprise development offers
are typically the most important in the enterprise market, with the median deal coming
in at $20.0 million in 2022, double that of the late stage. Being this massive, the
enterprise development stage is closely reliant on nontraditional capital, particularly
from crossover buyers, which have rapidly retreated from the opportunistic
enterprise technique they’ve deployed over the previous couple of years. This leaves
the enterprise development stage with a excessive variety of corporations and a lot decrease
capital availability. Alongside this, we could merely see fewer corporations wanting

to lift at this stage of VC, as an alternative specializing in sustainable development and cost-
chopping in order to steer clear of the troublesome capital-raising market.

Dangers: Much like the dangers related to our Unicorn Index outlook, a public
market U-turn that begins to unlock the excessive worth held by crossover buyers
may pull these establishments again into the enterprise market. One of many causes
crossover funding exercise has been so excessive in latest years is due to
the comparatively decrease liquidity danger that VC investments on the development stage have
introduced. Greater than 87% of the document $781.0 billion in exit worth generated in
2021 got here from IPOs, which many growth-stage corporations might want to understand
returns. There’s additionally a big pocket of capital tied up in SPACs that might be
liquidated and recycled into the enterprise development market.
Our enterprise development stage highlights a small portion of enterprise offers that account
for a a lot bigger portion of capital invested—5.5% of US deal depend and 26.6% of
US deal worth in 2021, to be actual. The $90.9 billion in enterprise development funding
in the US VC market throughout 2021 was a document excessive by a large margin, with the prior
high-water mark being simply $44.8 billion. The capital crunch on the prime of the enterprise
market has proven to be particularly difficult for enterprise development in 2022. By
November 23, solely $51.5 billion was invested in the enterprise development stage.
The short pullback from crossover buyers is problematic for enterprise development
as a result of many offers inside this house, particularly the most important, depend on nontraditional
capital. 80.5% of the enterprise development deal worth in 2021 included participation from
nontraditional corporations. Over the previous 5 years, a median of 73.9% of enterprise development
deal worth derived from offers with nontraditional investor participation. The exercise
of those establishments is important.
In Q3 2022, crossover buyers, the most important nontraditional buyers, participated in
lower than $12 billion in deal worth, making 211 investments throughout your entire enterprise
panorama. In contrast with the document quarters for every of those figures, each of
which occurred in 2021, that’s $33.0 billion much less and 304 fewer investments. The
unstable market has revealed nontraditional investor exercise in VC to be merely
opportunistic. For a lot of nontraditional buyers, liquidity danger is excessive. Hedge funds
and mutual funds should stay liquid sufficient to service redemptions (mutual funds
have strict liquidity rules), and the present financial local weather has proven to
make the market much more illiquid than regular.
Once we take a look at our estimate for capital demanded and examine it with our

Kyle Stanford, CAIA
Senior Analyst, US Enterprise Lead
kyle.stanford@pitchbook.com

10
PitchBook Analyst Observe: 2023 US Enterprise Capital Outlook

estimate for capital provide for the stage, we see {that a} broad hole has fashioned in

2022. This void of funding for enterprise development units 2023 as much as be very difficult
      for corporations needing capital. Not solely may they continue to be unable to entry the
      public market by way of IPO, however with out the required provide of capital, which can
      typically be wanted to fund massive offers, it’s extra seemingly that corporations that discover
      themselves on the enterprise development stage will expertise down rounds and even failure.

Supply: PitchBook | Geography: US
*As of November 23, 2022

$7.8 $9.6

$17.6 $24.3 $22.0 $19.6 $29.5 $35.8 $44.8 $90.9 $51.5

429
491 542 511 480 526
608
674 720
988
738

0
200
400
600
800
1,000
1,200

$0
$20
$40
$60
$80
$100

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022*

Deal worth ($B) Deal depend

Enterprise development deal exercise

11
PitchBook Analyst Observe: 2023 US Enterprise Capital Outlook

Outlook: 2023 US VC mega-round exercise will fall under 400 offers, hitting a three-
12 months low.

Rationale: Mega-rounds, outlined as rounds with deal sizes of $100 million or
extra, have change into extra prevalent in latest years with surplus capital and the
excessive variety of buyers chasing VC offers. The VC dealmaking atmosphere
of the previous couple of years inspired a growth-at-all-costs mentality, encouraging
startups to return to market faster at larger valuations and search bigger
quantities of capital. Within the wake of the 2022 financial downturn, buyers are
presently targeted on the capital effectivity, path to profitability, and justifiable
valuations of startups. This shift in investor mentality, coupled with depressed
public markets affecting late-stage deal metrics and comparables evaluation, will
thwart the mega-round exercise in the approaching 12 months.
Dangers: There are near 1,300 privately held unicorns which have been unable
go public as a result of frozen IPO market. Unicorns in addition to startups which have
beforehand raised mega-rounds are prone to increase a mega-round in a subsequent
financing as a result of their unprofitable operations could have grown to require
further massive capital injections to maintain their exercise till an exit. 2021 was
a document 12 months for mega-rounds, and the businesses that raised these rounds will
seemingly have to return to market by 2023. Their return may prop up mega-round

exercise. Moreover, 2022 noticed a document quantity of capital consolidate in larger-
measurement VC funds. This consolidation may result in bigger checks being written and

finally enhance the whole variety of mega-rounds subsequent 12 months.
Mega-rounds have fallen on a QoQ foundation all through 2022, from 201 rounds in Q1, to
161 rounds in Q2, to 103 rounds in Q3. Contemplating the fourth quarter’s preliminary
knowledge, we count on an extra 80 to 100 mega-rounds will probably be accomplished, bringing
this 12 months’s annual whole to round 550 offers. Stemming from the stress of public
market uncertainty and frozen paths to liquidity, this 12 months’s mega-round exercise
will probably be a far cry from the 836 mega-rounds noticed in 2021. Utilizing our prior
conjecture, extrapolating 2022’s fourth-quarter exercise, and anticipating an additional
slowdown leads us to count on lower than 100 mega-rounds will probably be noticed per quarter,
culminating in a 2023 annual determine of lower than 400.
Most mega-rounds happen in the late stage, so it’s pertinent to look at the latest
dealmaking developments of startups in that stage. Late-stage deal metrics have fallen properly
under 2021 figures, indicative of the unsustainable development fostered in latest years.
By Q3 2022, the median late-stage deal measurement was $11.5 million, a 20.6% drop
from the 2021 full-year determine of $14.5 million. As median deal sizes decline, we will
count on fewer mega-rounds to happen. The highest-decile late-stage deal measurement was $75.0
million in Q3, a dramatic discount from the document excessive of $143.7 million in This fall 2021.
Even the highest-performing late-stage offers are getting squeezed, making the
prospect of expansionary mega-round exercise in the approaching 12 months inconceivable.
Tandem to the dialog of mega-round exercise is the participation of
nontraditional buyers, which overwhelmingly contribute to the expansion of the
largest startups previous to their public listings or different exit occasions. From 2018 to 2021,

nontraditional buyers have participated in 91% of mega-rounds and 93% of mega-
spherical deal worth per 12 months on common. By Q3 2022, nontraditional buyers

Max Navas
Analyst, Enterprise Capital
max.navas@pitchbook.com

12
PitchBook Analyst Observe: 2023 US Enterprise Capital Outlook

participated in mega-rounds with deal worth totaling $88.5 billion, considerably
lower than the $181.9 billion in mega-round deal worth they participated in final 12 months.
Nontraditional buyers supply a needed capital supply to assist startups exceed
deal sizes of $100 million. If nontraditional buyers cut back their funding in VC
markets, mega-round exercise will fall. We count on nontraditional investor participation
to shrink additional in the approaching 12 months, limiting the variety of startups that may
efficiently increase mega-rounds.
Lastly, it is vital we handle the dangers of the plethora of startups that raised
mega-rounds in prior years doubtlessly returning to market in 2023 to lift once more.
Utilizing PitchBook knowledge, we examined the median time between rounds for startups
which have raised mega-rounds and noticed a median between 1.0 and 1.2 years from 2019
to 2022. Primarily based on this, we are going to concentrate on startups that raised mega-rounds final 12 months,
as they are going to seemingly have to return to market quickly in the event that they haven’t already. Of the 832
startups that raised mega-rounds in 2021, 104 already returned to market this 12 months,
which means fewer of these startups might want to return in 2023. As a result of harsher VC
atmosphere, we count on a good variety of the remaining startups to think about enterprise
debt to complement their want for fairness financings. Startups that decide to lift enterprise
debt may reduce the burden on elevating fairness; for instance, if a startup have been to
safe $50 million in fairness and tackle $50 million in enterprise debt, their financing
spherical wouldn’t present up as a mega-round regardless of having mega-round capital. In the event that they
are unable to safe enterprise debt, they could resort to down rounds with deal sizes
lower than $100 million, search out acquirers to generate a liquidity occasion, and even exit
of enterprise. Consequently, we’re skeptical of the continued development of mega-round
exercise in the approaching 12 months and forecast fewer than 400 rounds closing.

Supply: PitchBook | Geography: US
*As of September 30, 2022
0
50
100
150
200
250

$0
$10
$20
$30
$40
$50
$60

Q1 Q2 Q3 This fall Q1 Q2 Q3 This fall Q1 Q2 Q3 This fall Q1 Q2 Q3 This fall Q1 Q2 Q3 This fall Q1 Q2 Q3
2017 2018 2019 2020 2021 2022*

Deal worth ($B) Deal depend

VC mega-round deal exercise by quarter

13
PitchBook Analyst Observe: 2023 US Enterprise Capital Outlook

Outlook: US VC fundraising will fall between $120 billion and $130 billion in 2023.
Rationale: Regardless of US VC fundraising reaching a historic excessive in 2022, we count on
a slowdown to happen in 2023 as LPs grapple with liquidity considerations and contemplate
various investments in different asset courses positively affected by rising
rates of interest. Declining public fairness valuations can create a “denominator
effect” for a lot of LPs, akin to endowments, pension funds, and sovereign
wealth funds (SWFs), whose enterprise asset holdings change into too massive relative
to different asset courses outlined in their mandates. Our in-depth methodology
for this phenomenon may be discovered right here. Declining public market valuations additionally
create an extra liquidity crunch for a lot of LPs, as public fairness markdowns
cut back the capital they will count on to obtain as lockup intervals for latest exits
expire. Rising rates of interest, that are largely guilty for the downward pattern
in fairness valuations, have additionally created lower-risk alternatives for LP capital
in different asset courses, taking much more consideration away from non-public market
fundraising.
Dangers: Allocations to enterprise belongings inside an LP’s portfolio usually characterize
a small general share; due to this fact, massive reductions in allocations could
not happen. Moreover, as identified in our Q3 2022 World Personal Market
Fundraising Report, established fund managers with profitable observe information,
particularly those that have completed properly regardless of poor market situations, have had
nice success in capitalizing on LP curiosity; globally, 68.4% of whole VC raised
went to established managers in 2022, in contrast with 58.3% and 54.9% in 2021
and 2020, respectively. This upward pattern illustrates the chance for bigger,
established fund managers to extend their market share of energetic LPs with
versatile allocation mandates in 2023.
The exit atmosphere of 2022 has been torpid relative to earlier years, with
simply $63.4 billion in exit worth generated YTD (not together with Adobe’s acquisition
of Figma, which is anticipated to shut in 2023), a big decline from final 12 months’s
document of $781.5 billion. As mentioned in our most up-to-date PitchBook-NVCA Enterprise
Monitor, this 12 months’s whole exit worth, which we count on to be the bottom since 2016,
is an actual reason behind concern as a result of the shortage of liquidity pushed by the slowdown in
exit exercise may discourage LPs from recycling capital into the VC ecosystem.
Even in circumstances the place VC valuations could stay steady or are marked up, ensuing
in unrealized beneficial properties, money returns to LPs finally dictate the place future {dollars} are
allotted, together with to present capital commitments or into new funds.
Moreover, robust markdowns in public markets have diminished the quantity of
capital returns that endowments, pensions, and SWFs can count on to obtain if
and after they select to promote shares from latest exits whose lockup intervals have
expired. The shortage of realized worth relative to 2021’s document exit worth technology
is prone to trigger a capital crunch for a lot of LPs, and this discount in capital places
a pressure on present liquidation mandates, so there’s prone to be some hesitation
when contemplating recycling any out there money into the comparatively illiquid VC
market. Given the continuing uncertainty round public market situations, we count on
the quantity of capital commitments from these buyers to proceed to say no
in 2023 as these corporations look to fulfill liquidity rules and different mandates
outlined in their investor coverage statements.

Vincent Harrison
Analyst, Enterprise Capital
vincent.harrison@pitchbook.com

COPYRIGHT © 2022 by PitchBook Information, Inc. All rights reserved. No a part of this publication could also be reproduced in
any kind or by any means—graphic, digital, or mechanical, together with photocopying, recording, taping, and
info storage and retrieval programs—with out the specific written permission of PitchBook Information, Inc. Contents
are primarily based on info from sources believed to be dependable, however accuracy and completeness can’t be assured.
Nothing herein ought to be construed as funding recommendation, a previous, present or future suggestion to purchase or promote
any safety or a proposal to promote, or a solicitation of a proposal to purchase any safety. This materials doesn’t purport to
include the entire info {that a} potential investor could want to contemplate and is to not be relied upon as such or
used in substitution for the train of unbiased judgment.

14
PitchBook Analyst Observe: 2023 US Enterprise Capital Outlook

Rates of interest have marched upward for many of 2022 because the Fed continues its
most aggressive set of price will increase because the Eighties. Whereas these price will increase
have been the first reason behind fairness valuation declines in public and non-public
markets, they’ve inversely created a safer approach for buyers to lock in constructive
returns in different asset courses. As of December 6, 2022, the benchmark 10-year
Treasury yield completed at 3.5%, whereas the two-year Treasury yield—which is even
extra delicate to near-term Fed coverage adjustments—completed at 4.4%. These figures
are among the highest we now have seen because the 2007-2008 World Monetary Disaster.
Contemplating the truth that larger yields translate to falling bond costs, and larger
risk-free charges enhance the return wanted from VC investments, it’s seemingly we are going to
see buyers allocating extra capital to fixed-income devices as a lower-risk
path to money returns. Doing so would theoretically cut back the quantity of capital
allotted to different various, illiquid asset courses, akin to VC, thus additional
lowering fundraising ranges in 2023. Nevertheless, you will need to be aware that many
buyers predict a recession is on the best way, which may ultimately lead the Fed to
halt price will increase or decrease them totally, due to this fact lowering the attractiveness of
such a method.