Despite a decline in venture capital (VC) funding during Q2’22, the VC market in the U.S. showed resilience during the quarter, with investment higher than in any quarter prior to Q1’21. In Q2’22, U.S. VC-backed companies raised $62.3B across 3,374 deals.
Fundraising activity on record pace at mid-year
Fundraising activity in the U.S. remained robust in Q2’22, with the amount of funds raised already closing in on the 2021 annual record-high of $140 billion at mid-year. Current market conditions have prompted some LPs to reallocate funds to make certain their asset class allocations are aligned; such changes, however, have not yet had an effect on the flow of capital to the VC market. Top tier VC firms in particular have not experienced any difficulty raising new funds.
After months of relative immunity to market turmoil, Series A and Seed stage deals are starting to feel pricing pressure. VC firms are beginning to demand that companies show more robust revenue before seeking a Series A round. So, companies that got a good seed round with the expectation that they would be going to market for a Series A round within a prescribed timeframe are now having to hold on for longer than expected. This is likely forcing them to rethink their spending very quickly
– Jules Walker, Senior Director, Business Development, KPMG Private Enterprise
Startups focusing on reducing cash burn
With the inflation rate soaring, interest rates on the rise, and growing indications that the U.S. is entering a recession, startups at all levels of maturity in the US are evaluating their operations and moving to rein in their cash burn. During Q2’22, companies started reconsidering their growth strategies, adjusting their headcount and, in the case of many consumer-focused businesses, looking at ways to improve and enhance their unit economics. Many VC investors have also directed their portfolio companies to focus on cash preservation in order to delay their need for new funding or to support their operations while waiting for the IPO market to reopen.
Companies in the US are really starting to tighten their belts. Almost everyone is going to need to hunker down and ride this out for however long it will last…and that’s still the $64,000 question: how long is this going to last? It’s not clear yet. Although there will certainly be some outliers….cybersecurity will likely buck any downward trends, along with anything that’s embedded in solving supply chain issues.”
– Conor Moore, National Leader, KPMG Private Enterprise
IPO market remains shuttered in Q2’22
The IPO exit door in the U.S. remained firmly shuttered in Q2’22, a sharp contrast to the record-shattering IPO results seen throughout 2021. With market uncertainty high and no end in sight to the crisis in Ukraine, IPO exits are expected to remain stalled into Q3’22. M&A activity, however, is well positioned to grow as acquirers look to take advantage of the decline in valuations to make more affordable deals. PE activity could also increase as companies flounder or fail to raise new funding rounds.
Trends to watch for in Q3’22
Heading into Q3’22, VC investment in the U.S. could dip—a trend not unexpected given most summer quarters in the US see a decline in activity as a significant number of VC market participants take vacations. The current geopolitical uncertainty and macroeconomic environment could also negatively impact the level of VC investment.
Valuations are expected to remain soft in Q3’22. Companies in industries like alternative energy, cybersecurity, and supply chain management will likely remain attractive to investors, while discretionary consumer-focused companies will likely lose their luster.
The IPO market will likely remain closed in Q3’22, although M&A activity could increase as investors look to take advantage of the drop in valuations to make acquisitions and some industries see companies consolidating to improve their market position.
In the U.S. in Q2'22
VC deal value drops to $62.3 billion
Deal volume drops to 3,374 deals
Angel and Seed investments increase as percentage of deals
For insights into global VC investments
About the Pulse Series
The Pulse Series of reports—Venture Pulse and the Pulse of Fintech—analyze the latest global and regional investment trends and insights. Included in the reports we provide perspectives and analyses on the lifecycle of venture capital investments as well as overall fintech investment across the Americas, Europe, and Asia. In each report, we share the latest valuations, financing, deal sizes, mergers & acquisitions, exits, corporate investment, and industry trends.
