Market Outlook of VC Industry in 2022 Q3
As Predicted, Global VC Investment Amounts and Deals Dropped Again in 2022 Q3
It has been a tough year for VC and starups. The VC investment amount plunged by 34% in 2022 Q3 as compared to 2022 Q2, while the number of investment deals fell by only 10%. The total investment amount of USD$75B is very close to the numbers in 2020 Q1 (USD$61B). However, with less cash being invested, VC’s dry powder has exceeded the highest level ever. This will be interesting to monitor while going forward into 2023.
VC Deals Are Down but VC Dry Powder Remains High
One question that has been getting a lot of buzz lately is that, with so much uninvested money on hand, will VC investment explode in 2023?
Those who hold a positive view believe that although all the data show that VC investment is shrinking, VCs have a lot of cash on hand that they must spend. VCs are simply just being cautious and don’t want to invest now. According to Jon Sakoda (Founder of Decibel Partners), VCs have raised USD$573B since 2016, and still have USD$261B on hand to deploy. (Original article: Opening the Floodgates: The $290 Billion Venture Capital Reserve)
This figure is supported by Pitchbook, who observed that VC dry powder has accumulated beyond the level of 2021 and is currently sitting at USD$290B. Taking the investment period into consideration, VCs must deploy a major part of the money on hand in the next three years (2023 to 2025). Jon Sakoda suggested that even though the market is in contraction in 2022, it is possible that a big VC investment explosion may return in 2023.
But there are others who think otherwise. Firstly, some believe that dry powder statistics are delayed and a lot of money has been spent, but not yet counted. Secondly, they think the reason for the excess dry powder this year is due to the multitude of IPOs and SPACs in 2021. Most LPs are putting money back into the next fund to support GPs. Nonetheless, since there have been very few IPOs in 2022 thus far, a similar scenario is likely not to happen in 2023.
In general, although the calculation of VC dry powder is delayed, even given a 60% discount, VCs still have close to USD$200B of dry powder on hand, which is still above the 2020 level. It is no doubt that VCs have dry powder; The question is whether or not they will deploy it next year.
Our view is that, due to the market downturn, VCs will be more cautious in their investments, which has caused a significant slowdown in VC investments from 2022 Q1 onwards and a downwards adjustment of the valuation of deals. The situation now is that VCs are carefully deploying cash and are bargaining for more VC-favorable term sheets. The market madness of quick dry powder deployment has disappeared and has been replaced by a prolonged and detailed DD and decision-making process. We feel that an explosion of VC deals in 2023 is unlikely, but we should still see an upward trend of VC activities going forward. Since a typical VC fund usually has a 3+1 year investment period, the dry powder accumulated from 2020 to 2022 will need to be deployed in 2024 to 2026, which is 15 to 27 months away. This is the time frame we project to be the start of recession recovery. We also expect VCs to consolidate their dry powder towards select winners within their existing portfolio, ensuring sufficient runway for their winners through the harsh winter, and emerging into the recovery in 2024–2026 and ripe for exit.
Early-stage startups who have better-prepared runway and business will have a good chance for the next big round of investments when the VC market warms up. And that is the reason why Hive Ventures has been asking portfolios to prepare 18 to 24 months of runway and to carefully spend their money.
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