After a booming 2021, the tech industry hit a rough patch in 2022 with more than 150,000 layoffs, reduced access to venture funding and all-around economic uncertainty.
While venture capital is not necessarily an economic growth indicator, the drying up of VC funds combined with market corrections and contractions has posed growth challenges across the tech sector.
According to recently released data from PitchBook-NVCA Venture Monitor, last year’s VC deals totaled $238.3 billion, which is a 30.8 percent decrease from the record-breaking $344.7 billion doled out by VC companies in 2021. While last year’s VC figures were down compared to 2021, last year’s deal total was 39 percent higher than the $171.2 billion allocated in 2020.
Last year’s VC activity started out strong, but it dropped off hard in the second half of the year. VC deals totaled $79.8 million in Q1 and $75.5 million in Q2, but in Q3 those numbers dropped 38 percent to $46.8 million. VC deals declined even further in Q4 to $36.2 million, which is the lowest it has been since Q4 of 2019, according to PitchBook.
“When graded against any year other than the stratospheric 2021, industry activity was extremely strong,” the report states. “However, it is important to look at the quarterly trend, where activity dropped off steeply between the first and last quarters of 2022. The question is, was the decrease in activity during 2022 just the afterparty effect of 2021 wearing off? Or is the VC industry just taking a moment to regroup?”
While most types of VC funding took a hit in 2022, one funding category — angel and seed rounds — reached an all-time high last year. These deals totaled $21 billion last year, surpassing the $19.3 billion invested in 2021. Interestingly, the record-breaking deal total was spread across an estimated 7,261 deals, which is 387 less than the angel and seed deals signed in 2021. That means more money was allocated to fewer companies in 2022.
“We attribute the sustained strength of deal value to the increasing robustness of the pre-seed market, expansion of seed-stage investor participation and the prolonged time between startup foundings and seed rounds giving rise to more mature startups,” the report states.
Conversely, funding rounds at the Series A and Series B levels dropped to $68.4 billion last year as compared to $88 billion in 2021. The number of Series A and Series B deals, however, slightly increased from 5,392 in 2021 to 5,398 last year. The billion of dollars allocated across Series A and Series B deals in 2022 was still higher than any year prior to 2021, according to the report.
While the dip in Series A and Series B rounds was noticeable, VC investors did invest more than $1 billion in a Series A round for TeraWatt Infrastructure, which is developing charging infrastructure for electric vehicles. Artificial intelligence research startup Anthropic landed a $580 million Series B in April, and blockchain infrastructure company Mysten Labs secured a $300 million Series B in September.
Larger enterprises had more difficulty raising funds. The total value of Series C and Series D deals dropped from $146 billion in 2021 to $93.7 billion in 2022. The values of Series E and F rounds fell from $91.4 billion in 2021 to $55.1 billion last year, too. The deal totals for these later-stage rounds all exceeded pre-2021 levels.
“Unable to justify the sky-high valuations seen in 2021 and retreating from the growth-at-all-costs mindset seen in recent years, many investors are pulling away from the [late-stage funding] space until things return to a more palatable normal,” the report states.
Late-stage companies that raised funding last year sometimes did so at decreased valuations because their value was benchmarked against publicly owned companies in the same industry. As a result, the report found the median valuation of Series C and Series D deals dropped 10.3 percent last year to $67.3 million.
Nevertheless, online payments giant Checkout.com more than doubled its valuation when it raised more than $1 billion through a Series D round last January. Anduril Industries, which develops autonomous defense solutions, nearly doubled its valuation with a $1.48 billion Series E investment in December.
Are you curious about what all of this means for 2023? Built In asked investors from General Catalyst, Index Ventures and Antler to share their VC funding predictions in this Q&A article.