US Venture Capital Funding Hits Six-Year Low in Q3
Venture capital funding in the United States has reached its lowest level in six years in terms of both deal value and deal count during the third quarter, according to a report from the National Venture Capital Association. The report, called the Venture Monitor, revealed that VC activity in the US plummeted to its lowest deal value level since the second quarter of 2018.
The uncertain economic climate of the past 18 months has played a major role in this decline in venture capital funding. Geopolitical factors, including ongoing conflicts such as the recent war in Israel and Gaza, have affected investor enthusiasm, leading to cautious behavior in the stock market. As a result, deal counts are approaching the lowest level since before the pandemic in 2019.
The market for venture capital funding is under significant stress, with more companies resorting to bridge, continuation, or down rounds. Inside rounds, where existing investors provide additional funding, are at multiyear highs. Additionally, there are fewer rounds in which a new lead investor obtains a board seat compared to the past decade. Both investors and founders are prioritizing stability and cash flow to navigate the challenges posed by the current market.
Despite these challenges, the venture capital ecosystem remains adequately capitalized. Additional sources of liquidity are emerging from federal programs such as the Inflation Reduction Act, as well as the CHIPS and Science Act. However, pre-seed and seed deal counts in the US have hit a 12-quarter low, indicating a decline in early-stage funding. The relative share of pre-seed deals compared to early-stage deals has consistently dropped over the past year.
Late-stage and venture-growth deals have remained relatively stable in recent quarters. However, there has been a noticeable decrease in megadeals, with deals exceeding $100 million accounting for a smaller proportion of total deal value in the third quarter compared to the fourth quarter of 2021.
The decline in venture capital funding is not evenly distributed across the US. Deals are primarily concentrated in regional hubs, with some areas being more active than others. Furthermore, female founders are facing particular difficulties in accessing venture capital investment.
Regarding exits, the third quarter saw an increase mainly due to successful IPOs by companies like Instacart and Klaviyo. However, exits via mergers are fraught with additional regulatory risks. New guidelines from the Federal Trade Commission and Department of Justice have raised concerns in the industry. The NVCA believes that these guidelines increase the risk of small company acquisitions being blocked for theoretical reasons that lack substantive evidence, potentially hindering the growth of nascent firms.
The report also highlighted that fundraising for new VC funds has hit a nine-year low. In 2022, the majority of capital committed went to funds valued over $1 billion. However, the relative share of committed capital to funds valued between $100 million and $1 billion has drastically increased this year, comprising nearly two-thirds of funds raised in 2023 thus far. Despite a relatively stronger performance, emerging managers seeking to raise their first funds have struggled, representing only a small fraction of overall fundraising.
In terms of sectors, software deals have reached a multiyear low, while investment in life sciences, though lower than before, remains at a relatively high level compared to 2020.
These findings highlight the challenges faced by the venture capital industry in the US, particularly amid a volatile economic landscape. While the ecosystem remains resilient, it is imperative for investors, founders, and policymakers to find innovative solutions to maintain a robust and supportive environment for startups seeking capital.
