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

The deal count in 2022 for the full year was 15,852, down 14% from 18,521 in 2021. And deal value was $238.3 billion, down 30% from $344.7 billion a year earlier, according to a report by Pitchbook and the National Venture Capital Association (NVCA).

U.S. VC exit activity was 1,208 deals valued at $71.4 billion, down dramatically from 1,925 deals valued at $753.2 billion a year earlier

With each quarter the deal activity declined and that could foreshadow a slide in 2023, the report said.

On an annual basis, angel- and seed-stage deal activity remained relatively resilient in 2022, with $21.0 billion invested across an estimated 7,261 deals. However, the four consecutive quarters of declining deal counts could foreshadow a continued slide in 2023. Seed-stage deal sizes and pre-money valuations demonstrated notable growth over the 2021 figures due in part to a large number of actively investing micro-funds as well as the participation of nontraditional and crossover investors.

Should the economic downturn continue, the NVCA expects this stage to start to feel pressure due to declining deal activity and investor demand in the early and late stages.

Nontraditional investors are slowing their capital deployment to VC amid less attractive risk/return profiles. Relative to 2021, the upside potential for the VC asset class declined significantly in 2022, which turned many investors away from the space. As such, just $24.1 billion in deal value involved nontraditional investors in Q4— the lowest quarterly value in three years. Not only are we seeing lower deal value, but we are also seeing fewer nontraditional participants within the venture ecosystem.

Exit activity continued its steep descent in 2022, with just $71.4 billion in total exit value generated—the first time this figure has dipped below $100 billion since 2016. Public exits of VC-backed companies have slowed to almost nonexistent levels, with just 14 public listings occurring in Q4, demonstrating how drastically institutional-investor appetite has been affected by rising interest rates and volatile macroeconomic factors.

Acquisition activity has also declined significantly; Q4 posted roughly $763 million in total acquisition deal value, the first time we have seen this quarterly total fall below $1 billion in more than a decade.

VCs still raised a record $162.6 billion across 767 funds, hitting a record for the second straight year exceeding $150 billion.

The year saw an increasing amount of capital concentrated in larger-sized funds led by experienced
managers within the Bay Area and New York VC ecosystems. Despite this capital concentration, capital raised by emerging managers led to the second-largest annual figure on record, and several middle-market ecosystems sustained or increased their fundraising activity compared with the prior year.

In December, the Morningstar PitchBook US Unicorn Index said it will show a negative return from January 1, 2023 through December 31, 2023. It predicted Series C and D rounds would see the most down rounds, as these companies are currently the most starved for capital.

It noted seed-stage startup valuations and deal sizes will continue their ascent, reaching new annual highs despite a slowdown in total deal value and count. And it said SPAC IPOs and mergers will continue to decline while liquidations will continue to increase in 2023.

It also predicted venture growth deal value will fall below $50 billion in the U.S. VC mega-round activity will fall below 400 deals, hitting a three-year low. And it said 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, while our VC-Backed IPO Index is down 59.1%. This difference is due to
several factors, not the least of which being that nearly 200 unicorns have been
created in the US this year. However, the pace of new unicorn creation, and the
pace of unicorn rounds in general, has fallen precipitously in recent months. In
November, fewer than 10 completed rounds resulted in a post-money valuation
of $1.0 billion or more, well below the 48 completed in January, which saw the
year’s monthly high. With few new unicorn rounds maintaining the recency
bias toward private values, public comparables will impact unicorn pricing
more, putting downward pressure on the index as the public market remains
depressed.
Risks: While it continues to look less likely, a public market turnaround would
push the Unicorn Index into positive territory. Not only would increasing public
comparable prices put upward pressure on private values, but new unicorns
and new financings for current unicorns would also continue to have a positive
impact on the index as they have in 2022 and 2021.
The Morningstar PitchBook US Unicorn Indexes, which debuted in November, provide
insight into the opaque pricing of unicorns, companies with a post-money valuation
of $1.0 billion or more. The indexes are calculated daily using the most recent private
valuations and changes in public and private comparable companies.
Arguably the most important piece of the pricing model is the most recent valuation
of a company, pinning the value of a unicorn to its price upon completion of the round.
The further away from that round the company gets (there is a roughly 18-month span
between unicorn rounds), public and private comparable companies increasingly impact
the company’s valuation.
When we look at the 2022 US index return of 1.0%, the large number of unicorn rounds
throughout the year has tied many index constituents to their most recent priced round,
most of which were at a valuation step-up. At the same time, we have not yet seen a
marked increase in private company down rounds during the economic slowdown.
In 2022, the median step-up for late-stage valuations has been 2.1x—higher than the
median step-up in 2021. However, this figure has decreased rather quickly throughout
the year. The median late-stage step-up in Q3 2022 was just 1.8x, indicating that private
valuation growth, which would underpin unicorn valuations, are growing at a much
slower rate. We expect this trend to continue in 2023 so long as the public market is less
receptive to high-growth, high-loss companies, as many unicorns are likely to be seen.
The US Unicorn Index has returned much higher than what was seen in the broader
public market or in our VC-Backed IPO Index. However, in November just nine deals were
completed for a post-money valuation of $1.0 billion or more. We believe this trend will
continue, potentially falling even further as the pressure created by stagnating value in
the private market constrains activity. We also believe that down rounds and further
slowing of valuation growth are likely to be trends in US venture in 2023. These factors
will increase the public market’s effect on the index’s pricing.

Kyle Stanford, CAIA
Senior Analyst, US Venture Lead
[email protected]

3
PitchBook Analyst Note: 2023 US Venture Capital Outlook

Outlook: Series C and D rounds will see the most down rounds, as these
companies are currently the most starved for capital.
Rationale: When we compare the estimated capital demanded by startups to
observed deal value in each quarter, we can track deal activity dislocations
in the market. Relative to historical trends, all stages have seen a massive
dislocation of deal activity starting in Q4 2020, but nowhere is this more
pronounced than the late stage. In Q4 2022, 3.5 times more capital was
demanded than the deal value observed. This could mean that the late stage
became the most overextended during the VC dealmaking frenzy of 2020 and

2021. As these companies grapple with the new reality of higher interest rates
      and stricter deal terms, they will not be able to raise at their previous paces,
      high cash burn rates, or valuation levels. Depending on how long it takes for the
      IPO window to open, we may see these companies cut operations significantly
      to increase runway at the expense of short-term growth. If or when these
      companies need additional capital from the private markets, many will have to
      raise it at a reduced valuation.
      Risks: Investors on the capitalization tables of these late-stage companies
      may not want to see their own investments written down and could come in
      to support these companies at the last round’s valuation to extend the runway
      of the companies. Additional capital provided to a company to keep it afloat
      would be better than a failed business. This occurrence could be especially
      prevalent if 2023 starts off with a heavily improved IPO market where investors
      can rationalize additional capital investment if they see a light at the end of the
      tunnel. Furthermore, investors that were anxious to see a piece of these highly
      valued companies could have skimped on due diligence and may have left
      themselves even more exposed than in normal markets. This could increase the
      incentive to send good money after bad, so to speak.
      In the chart below, we plot the estimated capital demand by stage over that stage’s
      observed deal value. This could be thought of as the amount of demand that was
      fulfilled by the market, or a “pace of dealmaking” metric. We can see below that
      companies in the late stage are the most capital-starved, with a demand of 3.5 times
      what was actually fulfilled in 2022. Their estimated capital demand has seen the
      least amount of support in terms of observed deal activity.
      We estimate the capital demanded by startups using a bottom-up analysis where

each deal generates estimates into the future based on historical deal size step-
ups and the distribution of time between rounds at the time of that fundraising. By

reviewing our reported deal value over time, we have determined that we tend to
add 10% of deal value to the most recent quarter due to a reporting and collection
lag. Therefore, we have added 10% of deal value to our reported deal value in the
current quarter only.
We see the biggest growth in capital demand relative to deal size at the late stage

Alex Warfel, CFA
Quantitative Research Analyst
[email protected]

4
PitchBook Analyst Note: 2023 US Venture Capital Outlook

because these companies are large enough to put capital to work in a meaningful
way. Smaller, early-stage companies may not have had the ability to expand
operations significantly in a market like that of 2020 and 2021, when capital was
cheap. However, this operational expansion came with greater ongoing expenses
that required greater funding in the future if the revenue from those operations
could not be converted into profit. When the funding market slowed down in 2022,
startups had to respond with layoffs, capital raises from other sources such as
venture debt, and so on.

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

0.0x
1.0x
2.0x
3.0x
4.0x

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2017 2018 2019 2020 2021 2022*

Early-stage VC Late-stage VC Venture growth

3.5x
2.5x
1.4x

Estimated VC demanded as a multiple of observed deal value by quarter

5
PitchBook Analyst Note: 2023 US Venture Capital Outlook

Outlook: Seed-stage startup valuations and deal sizes will continue their ascent,
reaching new annual highs despite a slowdown in total deal value and count.
Rationale: Seed-stage startups are more insulated from public market volatility
than their early- and late-stage counterparts because they are at the most
nascent stages of the VC lifecycle. Having just raised their first round of
institutional capital, they are farther away from an IPO and can bide their time
until paths to liquidity reopen. In recent years, and more prominently following

the 2022 economic downturn, investors traditionally allocating capital to late-
stage startups have moved upstream, targeting the earlier stage to capture

larger returns and secure access to promising startups. Dramatic reductions
in the cost to start and scale businesses, the prolonged time between startup
foundings and seed rounds, and the expansion of participants at the seed stage
have contributed to the development of a more robust pre-seed market. This
has led to larger capital raises and valuations at the seed stage that are more in
line with historical metrics associated with Series A or later rounds. Moreover,
the economic downturn could cause investors to encourage seed startups to
raise additional capital, which would extend their runway past the 18-month
standard and translate to larger deal sizes at this stage.
Risks: The frozen IPO market has diverted investment dollars traditionally
committed to late-stage companies to younger startups. Should market
conditions improve and paths to liquidity return, seed-stage deal metrics may
stagnate or fall in response to larger check writers returning to their original
investment strategies. Seed-stage startups have a higher rate of failure and thus
higher investment risk; this could cause GPs to be wary of allowing deal sizes
and valuations to continue increasing because more of their portfolios could
be exposed to this risk. Additionally, GPs could exercise stricter due diligence
of startups and limit seed-stage deal-metric growth in order to mitigate the
recent years’ relaxed due diligence protocols, which have led to unsustainable
valuations hurting late-stage startups and forcing them to consider marking
down their portfolios.
Seed-stage startups are more mature than they have ever been. With a median of 2.4
years since founding, they are nearly double the age of seed-stage startups a decade
ago. Their maturity has contributed to the median seed-stage deal size, 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 conditions and the Federal Reserve’s
(the Fed’s) monetary tightening, seed deal metrics have increased QoQ. Q3 saw a
record-high median deal size of $3.3 million, reinforcing this stage’s insulated nature due
to the extended time to an IPO.
Further supporting the prospect of seed-stage growth in 2023 is the large number of
micro-funds (funds with less than $50 million in capital commitments) closed in recent
years. Venture funds typically make their investments over a period of three to five
years, so we have examined the micro-fund fundraising activity over the last decade,
breaking it into five-year periods. In the five-year period from 2018 to 2022, 1,770
micro-funds have been closed, amassing $24.4 billion in capital commitments. In the
five-year period starting in 2013, 1,280 micro-funds were closed with just $15.6 billion in
commitments. The increasing amounts of capital allocated to micro-funds as well as the

Max Navas
Analyst, Venture Capital
[email protected]

6
PitchBook Analyst Note: 2023 US Venture Capital Outlook

number of micro-funds competing for deals have bolstered seed-stage deal metrics in
recent years. The micro-funds closed from 2013 to 2017 largely contributed to the 2018
median seed-stage deal size and pre-money valuation of $1.8 million and $6.0 million,
respectively. The record highs set by seed-stage metrics in 2022 are due in part to the
expansion of micro-fund activity over the last five years, and as a result we can assume
that there will be a healthy number of micro-funds actively investing at the seed stage in
the coming year.
Traditional late-stage investors also play a significant role in the growth of seed deal
metrics. In recent years we have seen experienced managers such as Tiger Global,
Greylock Partners, and Andreessen Horowitz commit to investing or raising $1 billion,
$500 million, and $400 million, respectively, to back founders at the seed stage.1,2,3
The general need for larger-size funds to write larger checks in order to maintain their
expected return profiles will support the growth of seed-stage deal metrics in the
coming year.
In addition to late-stage venture capitalists launching seed-stage funds, we have also
seen larger venture capitalists increase their participation in seed-stage deals and
driving up the median deal size. Using PitchBook’s data, we examined the seed-stage
investment activity of Accel, Andreessen Horowitz, Greylock Partners, Intel Capital,
Khosla Ventures, Kleiner Perkins, Lightspeed Venture Partners, and Sequoia Capital
between 2020 and 2022 and found that the collective participated in 154 seed-stage
investments in 2020 and had already made 208 investments through mid-December of

2022. The subset of 2020 seed investments had a median deal size of $4.0 million, well
      ahead of the same year’s overall median seed-stage deal size of $2.0 million. Through
      mid-December of 2022, the median deal size had increased to $6.4 million, also well
      ahead of the overall median seed-stage deal size of $2.8 million. This activity lends itself
      to our bullish prospective of seed-stage deal-metric growth in the following year.

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

Source: 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*

Top and bottom quartile range Top decile Median Bottom decile Average

Seed deal value ($M) dispersion

7
PitchBook Analyst Note: 2023 US Venture Capital Outlook

Outlook: SPAC IPOs and mergers will continue to decline while liquidations will
continue to increase in 2023.
Rationale: Elevated market volatility has dramatically depressed valuations
in both public and private markets and has effectively halted public listings
through 2022. This impact has been noticeable not only for traditional IPOs
but also for companies looking to go public via a SPAC. Rising interest rates,
which impact consumer buying and borrowing power and thus earnings for
companies, have challenged the sky-high valuation multiples of 2020 and 2021.
Additionally, increasing regulatory scrutiny has negatively affected the primary
value propositions that SPACs offer to private companies, such as the ability to
reach public markets faster than a traditional IPO. These factors, among others,
have resulted in a sharp decline in SPAC issuance and combination activity and
in many cases have led to SPAC dissolution and capital returning to investors.
We expect these trends to be a driving theme in 2023 as turbulent market
conditions continue to dampen investor and private company interest in SPAC
vehicles.
Risks: Going public via a SPAC can still be an attractive option for some
private companies, and given the large number of SPACs that have yet to find
an acquisition target, it is possible that we will see an increased number of
mergers in 2023. As pointed out in our latest US VC Valuations Report, deal
value and count have decreased significantly for many late-stage companies
and unicorns, demonstrating a difficulty to raise capital in the private market.
Accessing public capital via existing SPAC vehicles could be a potential route to
funding given IPOs have been nearly nonexistent this past year, though there
will certainly be challenges along the way.
US SPAC activity has decreased significantly in 2022 amid volatile public markets, with
just 78 SPAC mergers totaling $38.2 billion YTD. Our team’s SPAC research note from
Q3 2022 observes that outside of the SPAC spike in Q4 2021, this is a continuation of the
trend we have seen since the end of Q1 2021. Indeed, SPAC formations are also down
with just 69 SPAC IPOs observed this year, which is the lowest annual total we have seen
since 2019. Given the propensity for SPAC favorability to coincide with positive market
performance, we expect these figures to continue to decline as we head into 2023.
Regulatory and legal headwinds have also contributed to the SPAC decline; most notably,
in Q3 2022, President Biden signed the Inflation Reduction Act of 2022 into law. The
act included a nondeductible 1% excise tax on the repurchase of corporate stock by a
publicly traded US corporation after December 31, 2022. This excise tax will apply to any
redemption by a US-domiciled SPAC, consequently incentivizing sponsors with no viable
target in sight to close shop before the year’s end. We have already observed this trend
as several high-profile SPACs have liquidated this year, including two from Chamath
Palihapitiya’s investment firm Social Capital. With more than 450 SPACs currently on
the market with a merger deadline in 2023, half of which with deadlines in Q1 2023, we
expect a significant increase in the number of SPAC liquidations by the end of Q1 2023 as
investors seek to recoup their capital and invest in asset classes better suited to navigate
the current market environment.
Furthermore, public market performance of companies that have gone public via SPACs

Vincent Harrison
Analyst, Venture Capital
[email protected]

8
PitchBook Analyst Note: 2023 US Venture Capital Outlook

will play a role in influencing investor appetite. Unfortunately, companies that have
managed to go public via the SPAC route have been especially battered by turbulent
market conditions; at the time of this writing, PitchBook’s DeSPAC Index shows a -64.5%
YTD return for public companies that have gone the SPAC route, compared with -17.3%
and -29.6% YTD returns for the S&P 500 and Nasdaq, respectively. While not a perfect
proxy for comparison, this sizable difference, among other factors, has curbed SPAC
formation and fundraising. We expect SPAC formation to continue its decline well into
2023, considering not only underperformance relative to major public index returns but
also increasing regulatory scrutiny and overall market volatility. Additionally, of the more
than 450 SPACs still looking to strike a deal, we expect more than 50% to liquidate and
return cash to investors in 2023.

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

Source: 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

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600

$0
$50
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2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022*

Aggregate post value ($B) Deal count

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

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

DeSPAC Index S&P 500 Nasdaq

SPAC IPO activity

DeSPAC Index versus public market indexes return

9
PitchBook Analyst Note: 2023 US Venture Capital Outlook

Outlook: Venture growth deal value will fall below $50 billion in the US.
Rationale: Our venture growth dataset showcases the latest stage of VC and
could be thought of as a pre-IPO stage of investment. Venture growth deals
are generally the largest in the venture market, with the median deal coming
in at $20.0 million in 2022, double that of the late stage. Being this large, the
venture growth stage is heavily reliant on nontraditional capital, especially
from crossover investors, which have quickly retreated from the opportunistic
venture strategy they have deployed over the past couple of years. This leaves
the venture growth stage with a high number of companies and much lower
capital availability. Alongside this, we may simply see fewer companies looking

to raise at this stage of VC, instead focusing on sustainable growth and cost-
cutting in order to stay away from the difficult capital-raising market.

Risks: Similar to the risks associated with our Unicorn Index outlook, a public
market U-turn that begins to unlock the high value held by crossover investors
could pull these institutions back into the venture market. One of the reasons
crossover investment activity has been so high in recent years is because of
the relatively lower liquidity risk that VC investments at the growth stage have
presented. More than 87% of the record $781.0 billion in exit value generated in
2021 came from IPOs, which many growth-stage companies will need to realize
returns. There is also a large pocket of capital tied up in SPACs that could be
liquidated and recycled into the venture growth market.
Our venture growth stage highlights a small portion of venture deals that account
for a much larger portion of capital invested—5.5% of US deal count and 26.6% of
US deal value in 2021, to be exact. The $90.9 billion in venture growth investment
in the US VC market during 2021 was a record high by a wide margin, with the prior
high-water mark being just $44.8 billion. The capital crunch at the top of the venture
market has shown to be especially challenging for venture growth in 2022. Through
November 23, only $51.5 billion was invested in the venture growth stage.
The quick pullback from crossover investors is problematic for venture growth
because many deals within this space, especially the largest, rely on nontraditional
capital. 80.5% of the venture growth deal value in 2021 included participation from
nontraditional firms. Over the past five years, an average of 73.9% of venture growth
deal value derived from deals with nontraditional investor participation. The activity
of these institutions is vital.
In Q3 2022, crossover investors, the largest nontraditional investors, participated in
less than $12 billion in deal value, making 211 investments across the entire venture
landscape. Compared with the record quarters for each of these figures, both of
which occurred in 2021, that is $33.0 billion less and 304 fewer investments. The
volatile market has revealed nontraditional investor activity in VC to be simply
opportunistic. For many nontraditional investors, liquidity risk is high. Hedge funds
and mutual funds must remain liquid enough to service redemptions (mutual funds
have strict liquidity regulations), and the current economic climate has shown to
make the market even more illiquid than normal.
When we look at our estimate for capital demanded and compare it with our

Kyle Stanford, CAIA
Senior Analyst, US Venture Lead
[email protected]

10
PitchBook Analyst Note: 2023 US Venture Capital Outlook

estimate for capital supply for the stage, we see that a wide gap has formed in

2022. This void of funding for venture growth sets 2023 up to be very challenging
      for companies needing capital. Not only could they remain unable to access the
      public market through IPO, but without the necessary supply of capital, which will
      generally be needed to fund large deals, it is more likely that companies that find
      themselves at the venture growth stage will experience down rounds or even failure.

Source: 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

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

Deal value ($B) Deal count

Venture growth deal activity

11
PitchBook Analyst Note: 2023 US Venture Capital Outlook

Outlook: 2023 US VC mega-round activity will fall below 400 deals, hitting a three-
year low.

Rationale: Mega-rounds, defined as rounds with deal sizes of $100 million or
more, have become more prevalent in recent years with surplus capital and the
high number of investors chasing VC deals. The VC dealmaking environment
of the last few years encouraged a growth-at-all-costs mentality, encouraging
startups to return to market quicker at higher valuations and seek larger
amounts of capital. In the wake of the 2022 economic downturn, investors are
presently focused on the capital efficiency, 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 analysis, will
thwart the mega-round activity in the coming year.
Risks: There are close to 1,300 privately held unicorns that have been unable
go public due to the frozen IPO market. Unicorns as well as startups that have
previously raised mega-rounds are likely to raise a mega-round in a subsequent
financing because their unprofitable operations may have grown to require
additional large capital injections to sustain their activity until an exit. 2021 was
a record year for mega-rounds, and the companies that raised those rounds will
likely need to return to market by 2023. Their return could prop up mega-round

activity. Additionally, 2022 saw a record amount of capital consolidate in larger-
size VC funds. This consolidation could lead to larger checks being written and

ultimately increase the total number of mega-rounds next year.
Mega-rounds have fallen on a QoQ basis throughout 2022, from 201 rounds in Q1, to
161 rounds in Q2, to 103 rounds in Q3. Considering the fourth quarter’s preliminary
data, we expect an additional 80 to 100 mega-rounds will be completed, bringing
this year’s annual total to around 550 deals. Stemming from the pressure of public
market uncertainty and frozen paths to liquidity, this year’s mega-round activity
will be a far cry from the 836 mega-rounds observed in 2021. Using our prior
conjecture, extrapolating 2022’s fourth-quarter activity, and anticipating a further
slowdown leads us to expect less than 100 mega-rounds will be observed per quarter,
culminating in a 2023 annual figure of less than 400.
Most mega-rounds occur in the late stage, so it is pertinent to examine the recent
dealmaking trends of startups in that stage. Late-stage deal metrics have fallen well
below 2021 figures, indicative of the unsustainable growth fostered in recent years.
Through Q3 2022, the median late-stage deal size was $11.5 million, a 20.6% drop
from the 2021 full-year figure of $14.5 million. As median deal sizes decline, we can
expect fewer mega-rounds to occur. The top-decile late-stage deal size was $75.0
million in Q3, a dramatic reduction from the record high of $143.7 million in Q4 2021.
Even the highest-performing late-stage deals are getting squeezed, making the
prospect of expansionary mega-round activity in the coming year improbable.
Tandem to the conversation of mega-round activity is the participation of
nontraditional investors, which overwhelmingly contribute to the growth of the
largest startups prior to their public listings or other exit events. From 2018 to 2021,

nontraditional investors have participated in 91% of mega-rounds and 93% of mega-
round deal value per year on average. Through Q3 2022, nontraditional investors

Max Navas
Analyst, Venture Capital
[email protected]

12
PitchBook Analyst Note: 2023 US Venture Capital Outlook

participated in mega-rounds with deal value totaling $88.5 billion, significantly
less than the $181.9 billion in mega-round deal value they participated in last year.
Nontraditional investors offer a necessary capital source to help startups exceed
deal sizes of $100 million. If nontraditional investors reduce their investment in VC
markets, mega-round activity will fall. We expect nontraditional investor participation
to shrink further in the coming year, limiting the number of startups that can
successfully raise mega-rounds.
Finally, it is important we address the risks of the plethora of startups that raised
mega-rounds in prior years potentially returning to market in 2023 to raise again.
Using PitchBook data, we examined the median time between rounds for startups
that have raised mega-rounds and saw a median between 1.0 and 1.2 years from 2019
to 2022. Based on this, we will focus on startups that raised mega-rounds last year,
as they will likely need to return to market soon if they have not already. Of the 832
startups that raised mega-rounds in 2021, 104 already returned to market this year,
meaning fewer of those startups will need to return in 2023. Due to the harsher VC
environment, we expect a fair number of the remaining startups to consider venture
debt to supplement their need for equity financings. Startups that opt to raise venture
debt could lessen the burden on raising equity; for example, if a startup were to
secure $50 million in equity and take on $50 million in venture debt, their financing
round would not show up as a mega-round despite having mega-round capital. If they
are unable to secure venture debt, they may resort to down rounds with deal sizes
less than $100 million, seek out acquirers to generate a liquidity event, or even go out
of business. Consequently, we are skeptical of the continued growth of mega-round
activity in the coming year and forecast fewer than 400 rounds closing.

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

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

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2017 2018 2019 2020 2021 2022*

Deal value ($B) Deal count

VC mega-round deal activity by quarter

13
PitchBook Analyst Note: 2023 US Venture Capital Outlook

Outlook: US VC fundraising will fall between $120 billion and $130 billion in 2023.
Rationale: Despite US VC fundraising reaching a historic high in 2022, we expect
a slowdown to occur in 2023 as LPs grapple with liquidity concerns and consider
alternative investments in other asset classes positively affected by rising
interest rates. Declining public equity valuations can create a “denominator
effect” for many LPs, such as endowments, pension funds, and sovereign
wealth funds (SWFs), whose venture asset holdings become too large relative
to other asset classes outlined in their mandates. Our in-depth methodology
for this phenomenon can be found here. Declining public market valuations also
create an additional liquidity crunch for many LPs, as public equity markdowns
reduce the capital they can expect to receive as lockup periods for recent exits
expire. Rising interest rates, which are largely to blame for the downward trend
in equity valuations, have also created lower-risk opportunities for LP capital
in other asset classes, taking even more attention away from private market
fundraising.
Risks: Allocations to venture assets within an LP’s portfolio typically represent
a small overall percentage; therefore, large reductions in allocations may
not occur. Furthermore, as pointed out in our Q3 2022 Global Private Market
Fundraising Report, established fund managers with successful track records,
especially those who have done well despite poor market conditions, have had
great success in capitalizing on LP interest; globally, 68.4% of total VC raised
went to established managers in 2022, compared with 58.3% and 54.9% in 2021
and 2020, respectively. This upward trend illustrates the probability for larger,
established fund managers to increase their market share of active LPs with
flexible allocation mandates in 2023.
The exit environment of 2022 has been lethargic relative to previous years, with
just $63.4 billion in exit value generated YTD (not including Adobe’s acquisition
of Figma, which is expected to close in 2023), a significant decline from last year’s
record of $781.5 billion. As discussed in our most recent PitchBook-NVCA Venture
Monitor, this year’s total exit value, which we expect to be the lowest since 2016,
is a real cause of concern because the lack of liquidity driven by the slowdown in
exit activity could discourage LPs from recycling capital into the VC ecosystem.
Even in cases where VC valuations may remain stable or are marked up, resulting
in unrealized gains, cash returns to LPs ultimately dictate where future dollars are
allocated, including to existing capital commitments or into new funds.
Additionally, strong markdowns in public markets have reduced the amount of
capital returns that endowments, pensions, and SWFs can expect to receive if
and when they choose to sell shares from recent exits whose lockup periods have
expired. The lack of realized value relative to 2021’s record exit value generation
is likely to cause a capital crunch for many LPs, and this reduction in capital puts
a strain on existing liquidation mandates, so there is likely to be some hesitation
when considering recycling any available cash into the relatively illiquid VC
market. Given the ongoing uncertainty around public market conditions, we expect
the amount of capital commitments from these investors to continue to decline
in 2023 as these firms look to satisfy liquidity regulations and other mandates
outlined in their investor policy statements.

Vincent Harrison
Analyst, Venture Capital
[email protected]

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14
PitchBook Analyst Note: 2023 US Venture Capital Outlook

Interest rates have marched upward for most of 2022 as the Fed continues its
most aggressive set of rate increases since the 1980s. While these rate increases
have been the primary cause of equity valuation declines in public and private
markets, they have inversely created a safer way for investors to lock in positive
returns in other asset classes. As of December 6, 2022, the benchmark 10-year
Treasury yield finished at 3.5%, while the two-year Treasury yield—which is even
more sensitive to near-term Fed policy changes—finished at 4.4%. These figures
are some of the highest we have seen since the 2007-2008 Global Financial Crisis.
Considering the fact that higher yields translate to falling bond prices, and higher
risk-free rates increase the return needed from VC investments, it is likely we will
see investors allocating more capital to fixed-income instruments as a lower-risk
path to cash returns. Doing so would theoretically reduce the amount of capital
allocated to other alternative, illiquid asset classes, such as VC, thus further
reducing fundraising levels in 2023. However, it is important to note that many
investors predict a recession is on the way, which could eventually lead the Fed to
halt rate increases or lower them entirely, therefore reducing the attractiveness of
such a strategy.