Venture Capital Funding in the U.S. Facing Challenges Amid Changing Landscape

Venture capital funding in the U.S. experienced a decline in the third quarter, with both venture deal value and deal count reaching multi-year lows. The National Venture Capital Association’s Venture Monitor report revealed that U.S. VC activity dropped to its lowest deal value level since Q2 2018. The report acknowledged the recent economic turbulence but emphasized that the venture capital industry remains resilient. It stated, “Amid stormy seas, VC remains well positioned to ride the waves.”

Geopolitical Factors and Market Caution Inhibit Growth

While generative AI has seen significant growth this year, geopolitical factors and market caution have tempered enthusiasm. Investor caution is reflected in the stock market, with deal counts on track to hit the lowest figures since 2019, the year before the pandemic. The overall market is under considerable stress, and companies are adopting measures such as bridge, continuation, or down rounds. Inside rounds are at multi-year highs, and there is a decrease in rounds with new lead investors obtaining board seats. Investors and founders are prioritizing stability and cash flow to navigate the current market challenges.

Capitalization and Liquidity Sources

Despite the challenges, the venture capital ecosystem remains well capitalized. Additional sources of liquidity are becoming available through federal programs such as the Inflation Reduction Act, the CHIPS Act, and the Science Act. However, IPOs have been affected by the stock market’s low multiples in price/sales ratios. The current waiting list for companies looking to go public stands at 75. Nevertheless, the impending listings of prominent companies like Stripe, Chime, and Reddit may signal a more robust liquidity environment in the future.

• Pre-seed and seed deal counts in the U.S. have hit a 12-quarter low, reaching the lowest point since 2020.
• On the other hand, late-stage and venture-growth deals have maintained a relatively flat trend in the past several quarters.
• There has been a decrease in megadeals in the past year, with deals over $100 million accounting for 48.5% of deal value in Q3, compared to 60.0% in Q4 2021.
• Seed deal counts are set to fall below pre-pandemic levels.
• Deals are still concentrated in regional hubs across the U.S.
• Female founders continue to face particular challenges in the market.
• Q3 saw increased exit activity mainly due to IPOs by Instacart and Klaviyo.
• Exits through mergers come with additional regulatory risks following new guidelines set by the Federal Trade Commission (FTC) and Department of Justice (DOJ).

The NVCA has expressed concerns about the new FTC guidelines, stating that they increase the risk of blocking small company acquisitions for theoretical reasons that have little basis in reality. They argue that nascent firms, which lack monopoly power, are being misrepresented as “dominant.”

Fundraising Challenges for New VC Funds

Fundraising for new VC funds has reached a nine-year low. In 2022, a significant portion of capital committed went to the largest funds, with those over $1 billion receiving nearly half of all capital. The relative share of committed capital to funds valued between $100 million and $1 billion increased sharply over the year, making up the majority of funds raised in 2023 so far. Emerging managers trying to raise first funds have faced difficulties, with established managers attracting the majority of funds raised. First-time funds are on track to have their lowest count in approximately a decade.

Additionally, there have been shifts in investment trends:

• Software deals are at a multi-year low.
• Life sciences investment, while down, remains at the highest relative level since 2020.

Despite the challenges, the venture capital industry continues to adapt and seek opportunities in an ever-changing landscape.