Always worth keeping track of this as it is currently the growth engine of the US economy, financing smaller companies that as they grow are a very strong source of employment growth and innovation. The financing cycle is that 1) venture capital and private equity funds raise money from pension plans, companies and wealthy individuals; 2) they invest that money in companies at various stages of growth and maturity, 3) they sell those companies or their shares in those companies, presumably at a healthy profit, distributing the returns to the funds investors, who then hopefully put some of those returns back into new funds. The backdrop to everything
With higher interest rates and other factors, you might expect that venture activity has slowed in recent quarters. And you would be right. The third quarter experienced the lowest number of deals in about three years and the lowest value in six. For full year 2023, we are on pace to see a huge decline in both number of funding rounds and amount invested. For several years there have been a lot of mega-funding rounds, those over $100 million. Those have dropped precipitously. Which is a little surprising because those large investments tend to come in late-stage deals, and proportionately those have increased. Funds are becoming more risk-averse, which leads them to invest more in companies already perceived as successful. On the other hand, while the number of the earliest stage, or seed, rounds has dropped, the size of those rounds has increased, which creates a higher likelihood of having adequate capital to develop a business.
By industry type, software investments have declined while there is more investment in life sciences companies. At the exit end of the funnel, IPO activity is very muted, as is merger and acquisition transaction volume. Valuations have dropped, frankly into a more reasonable realm, but this leads funds to want to hold onto to the firms they have invested in longer to see if valuations rise again in the future. And the front end of the funnel is also very low, with few new funds starting up and capital committed at a multi-year low. The good news is that past funds still have huge amounts of uncommitted capital, assuming the funds’ investors honor their capital committments, so that future rounds for existing companies are at least plausible. (VC Report)