In Q4’22 both the number of VC deals and the total of VC investment in the US continued to fall, with VC investment dropping to less than a third of the amount raised during the record quarter experienced during Q4’21. While there continued to be a wealth of dry powder in the VC market, many VC investors pulled back from making major investments.
Increasing focus on energy, and ESG investments
Over the past year, the US government has implemented legislation quite favourable to the development of the EV ecosystem and to the development of energy infrastructure more broadly. This support has helped spur additional interest and VC investment in the space. During Q4’22, alternative energy and battery storage saw significant interest from VC investors in the US. Aerospace and Defense company Anduril raised $1.5 billion followed by Nuclear innovation company TerraPower raised $830 million during the quarter, while energy storage company Form Energy raised $450 million.
Renewed interest in cleantech and ESG has also helped drive investment in the US, both directly in ESG-focused solutions and in regtech solutions as companies look for better ways to understand and report on their energy efficiency and ESG activities and, in certain cases, manage their regulatory reporting requirements.
Other sectors that remained attractive to VC investors during Q4’22 included military and space-focused solutions, B2B solutions, and health and biotech.
Threshold-valued unicorns working to avoid down rounds
During Q4’22, the US VC market continued to see startups looking for ways to obtain funds without taking a hit to their valuations. A number of companies held flat rounds or conducted an extension of an existing funding round in order to raise bridge funding and potentially avoid the negativity associated with holding a true down round. The pressure to maintain an existing valuation is particularly true among companies hovering at the $1 billion unicorn company threshold given the negative publicity and employee morale that would likely result from losing unicorn status. The quest to maintain a valuation could lead companies to accept much more stringent deal terms, such as multiple liquidation preferences or ratchets, heading into Q1’23.
VC fundraising in US reaches record high in 2022
Fundraising activity in the US reached a record high in 2022, although the number of funds being raised sank dramatically compared to 2022. This likely reflects both established VC firms raising larger funds and LPs making bigger bets on proven VC firms and fund managers rather than on riskier first-time fundraising opportunities. During Q4’22, the time horizon for fundraising noticeably moved out, with funds taking longer to fully capitalize than has been seen in recent years. As a result, total fundraising will likely begin to fall heading into 2023.
After an extended period of time where growth was king and revenue was the top concern, many late stage and unicorn companies in the US have been forced to rein in their costs during 2022 and to heighten their focus on profitability. Q4’22 was no exception as tech companies laying off significant percentages of their workforces became normal rather than noteworthy as they worked to conserve their cash while delaying their next funding round or waiting for the IPO window to open again. This focus on cash management, combined with the downward pressure on valuations, has likely led to the big drop in investment for late-stage deals.
By comparison, the drop in VC investment at earlier deal stages was much less significant. This likely reflects the inability of many Series A and B companies to delay funding rounds given they are often operating in a bare-bones capacity aimed to get the most from every dollar.
Trends to watch for in Q1’23
Looking forward to Q1’23, VC investment in the US is expected to remain subdued, except in high priority sectors, including energy and B2B solutions. We could also see large pension and sovereign wealth funds examining their investment allocations—which could affect VC investment levels later in 2023.
Given the number of tech sector layoffs occurring in the US, particularly in Silicon Valley, talent will likely be an area to watch over the next few quarters to see how talent costs are affected or whether there is an upswell in new startups.
IPO activity is expected to remain dead well into 2023 in the US as companies continue to delay exits. Down rounds will likely become more common as late-stage companies run out of runway to delay new funding rounds. This could cause a number of unicorn companies to lose their status as their valuations drop below the $1 billion threshold—or accept less-than-optimal deal conditions (e.g., rachets) in order to maintain their position.
In the U.S. in Q4'22
VC deal value plummets to $36 billion across 2935 deals
Investment in B2B, software and energy hold steady
Corporate VC drops to lowest levels since Q4’1
Exits slide to lowest quarterly tally in years
$1 billion+ Mega-funds experience record year
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.