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The first quarter of this year will go down in history as one of the venture capital industry’s most difficult. At the beginning of 2023, the outlook for the VC space, like all others in the private markets, was one of a slower fundraising and dealmaking environment, but not too many people foresaw what was to come in March.
The troubles with Silicon Valley Bank dominated the news cycle last month, but in terms of overall market activity, it’s been a challenging quarter. Crunchbase data says that global funding in venture and growth circles was, at $76bn, around half of what it was in the first quarter of 2022. When Microsoft’s investment in OpenAI and Stripe’s $6.5bn capital raise are removed, the residual $60bn is indicative of just how much of a pullback the start-up ecosystem endured in Q1 this year. The Pitchbook-NVCA Venture Monitor says that VC-backed companies specifically recorded only $5.8bn in exits in the past quarter, less than 1% of 2021’s record for Q1.
The slowdown was to be expected. At the end of last year, the macroeconomic environment was a headwind for the private markets space to navigate; that’s not changed in the first quarter of 2023. There has been some unhelpful jobs data in the past few weeks, with ADP saying private companies added only 145,000 jobs last month, and the U.S. Bureau of Labor Statistics said the number of job openings decreased in February, as the impact of ever higher interest rates and inflation begin to bite.
Ever the optimist, however, I find solace in the amount of dry powder seemingly available in the venture capital market. Pitchbook says that VC funds raised $162bn last year, after raising more than $100bn in 2021. That’s a lot of money that’s available to fund the world’s next great ideas, and most of the VC funds that we talk to say that, while they are being more selective right now about deploying capital, when the macroeconomic environment improves, they’ll be looking to loosen the purse strings a little.
When that happens, of course, remains to be seen. But I’d like to think that it could happen in H2 this year – maybe, Q4. The second quarter looks like it’s going to be too soon for any meaningful uptick, as VCs are going to want to see evidence of macroeconomic certainty and data that’s trending in the right direction which might take a couple of quarters – and that’s assuming things go well. But when they do see this evidence, the VC deal market is primed for a quick rebound.
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Anthony D. Mascia is Managing Partner at EFSI. Connect with him on LinkedIn here.
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