NVCA: U.S. venture investments cooled down in Q1 after record 2021

Venture capital dealmaking activity and exits slowed in the first quarter after a record-breaking 2021, according to the Q1 2022 PitchBook-NVCA Venture Monitor.

In stark contrast to the flurry of public listing activity in 2021, IPOs and exits of VC-backed startups came to a near-complete halt during the first three months of the year with only $33.6 billion in exit value posted after three consecutive quarters over $192.0 billion.

That’s no accident as the war in Ukraine started on February 24 after weeks of tension that affected global markets. And investors don’t take as many risks in tense global environments.

It is evident that the uncertainty felt in the broader markets has affected venture liquidity markets more rapidly compared with dealmaking figures, the report said.

Investment activity remained strong, with the first quarter’s $70.7 billion in deal value representing the fifth-highest total in PitchBook’s database. Deal sizes and valuations have begun to slow, however, as the companies closest to the public market see public valuations reflected on them as they look to raise capital.

Nontraditional investor participation, a significant driver of top-line trends over the past few years, is on track to set a new quarterly record but may face headwinds in the coming months as public market volatility continues and the Federal Reserve raises interest rates.

Any softening in nontraditional investor activity will likely significantly affect VC deal value after years of record investment from these institutions. In contrast to the exit market, VC fundraising maintained the momentum of recent record years with more than $73.8 billion in commitments collected across 199 funds. Though a large portion of that total is in just a few funds, the added dry powder should help further insulate the market from immediate, major disruption.

“Economic and geopolitical headwinds in the first quarter brought about change in the US venture ecosystem after the constant upward trajectory of prior years,” said John Gabbert, founder and CEO of PitchBook, in a statement. “Although fundraising momentum remained strong, we saw a softening across dealmaking and a significant drop off in IPO activity. The longevity of this quiet period will be critical to the health of the VC liquidity environment given how concentrated VC exit value over the last two years has been with public listings. We expect to see the full impact of market volatility illustrated in the data over the next couple of quarters.”

“The start of 2022 has shown signs of an expected adjustment for the VC industry on the heels of a two-year period where VC-backed startups served as the backbone of the U.S. economy during the global pandemic,” said NVCA President and CEO Bobby Franklin, in a statement. “Where the slowdown will taper off remains to be seen, but VC investors are in a strong position with ample dry powder amassed in recent years and Q1 to continue fueling startups that are solving big needs and transforming how we live and work.”

Highlights of the quarter

The first quarter of the year has been categorized by an eerie lack of large exits with only $33.6 billion in exit value across an estimated 430 deals, the report said.

This total for capital exited is not historically low — it is more in line with figures posted in 2018 and 2019 — but does mark an 82.5% quarter-over-quarter decrease in exit value and 44.8% decrease in the overall number of exits.

IPOs of VC-backed startups significantly slowed during the first three months with only 28 public listings in Q1 compared to 74 in Q4 2021. Acquisition activity also saw a slower pace in Q1, dropping to $9.5 billion across 224 deals — the lowest since Q3 2020.

VC fundraising activity raised $73.8 billion in commitments across 199 funds in Q1. Funds raised already total 56% of 2021’s total year record of $131.5 billion.

The average fund size hit a new high of $386.5 million, with a slight decline at the median. Mega-funds (sized $500 million or larger) represented 86.1 percent of total capital raised in the quarter. Andreessen Horowitz closed on a trio of funds in January totaling $9 billion, contributing to the 19 total funds topping $1 billion during the quarter.

Investment activity

VC deal activity reached $70.7 billion invested across 3,723 deals in the first quarter of 2022, the fifth-highest quarter on record behind the consecutive quarterly records set in 2021. Quarter-over-quarter, deal value fell 35% from $95.4 billion in Q4 2021.

Mega-deal activity fell in Q1 as only 185 deals sized $100 million or more closed, bringing in $36.6 billion in capital. This pullback is relative as the total mega-deal count and value are still more than any year prior to 2018.

Nontraditional investor participation remained strong as deal numbers approached record levels in Q1 despite a slight pullback in deal value from Q4 2021. They participated in an estimated 1,823 deals valued at more than $52.5 billion.
First-financing continued at a historically high rate with more than 1,000 deals closed. Q1 finished with more companies raising their first institutional capital than any quarter prior to 2021.

The report is jointly produced by PitchBook and the National Venture Capital Association (NVCA) with support from Insperity and J.P. Morgan.