The deal rely in 2022 for the total 12 months was 15,852, down 14% from 18,521 in 2021. And deal worth was $238.3 billion, down 30% from $344.7 billion a 12 months earlier, in accordance with a report by Pitchbook and the Nationwide Enterprise Capital Association (NVCA).

U.S. VC exit exercise was 1,208 offers valued at $71.4 billion, down dramatically from 1,925 offers valued at $753.2 billion a 12 months earlier

With every quarter the deal exercise declined and that would foreshadow a slide in 2023, the report stated.

On an annual foundation, angel- and seed-stage deal exercise remained comparatively resilient in 2022, with $21.0 billion invested throughout an estimated 7,261 offers. Nevertheless, the 4 consecutive quarters of declining deal counts may foreshadow a continued slide in 2023. Seed-stage deal sizes and pre-money valuations demonstrated notable development over the 2021 figures due partially to numerous actively investing micro-funds in addition to the participation of nontraditional and crossover traders.

Ought to the financial downturn proceed, the NVCA expects this stage to begin to really feel stress on account of declining deal exercise and investor demand within the early and late levels.

Nontraditional traders are slowing their capital deployment to VC amid much less engaging danger/return profiles. Relative to 2021, the upside potential for the VC asset class declined considerably in 2022, which turned many traders away from the area. As such, simply $24.1 billion in deal worth concerned nontraditional traders in This autumn— the bottom quarterly worth in three years. Not solely are we seeing decrease deal worth, however we’re additionally seeing fewer nontraditional members throughout the enterprise ecosystem.

Exit exercise continued its steep descent in 2022, with simply $71.4 billion in complete exit worth generated—the primary time this determine has dipped beneath $100 billion since 2016. Public exits of VC-backed firms have slowed to nearly nonexistent ranges, with simply 14 public listings occurring in This autumn, demonstrating how drastically institutional-investor urge for food has been affected by rising rates of interest and risky macroeconomic elements.

Acquisition exercise has additionally declined considerably; This autumn posted roughly $763 million in complete acquisition deal worth, the primary time we now have seen this quarterly complete fall beneath $1 billion in additional than a decade.

VCs nonetheless raised a file $162.6 billion throughout 767 funds, hitting a file for the second straight 12 months exceeding $150 billion.

The 12 months noticed an growing quantity of capital concentrated in larger-sized funds led by skilled
managers throughout the Bay Space and New York VC ecosystems. Regardless of this capital focus, capital raised by rising managers led to the second-largest annual determine on file, and a number of other middle-market ecosystems sustained or elevated their fundraising exercise in contrast with the prior 12 months.

In December, the Morningstar PitchBook US Unicorn Index stated it should present a adverse return from January 1, 2023 by way of December 31, 2023. It predicted Sequence C and D rounds would see probably the most down rounds, as these firms are presently probably the most starved for capital.

It famous seed-stage startup valuations and deal sizes will proceed their ascent, reaching new annual highs regardless of a slowdown in complete deal worth and rely. And it stated SPAC IPOs and mergers will proceed to say no whereas liquidations will proceed to extend in 2023.

It additionally predicted enterprise development deal worth will fall beneath $50 billion within the U.S. VC mega-round exercise will fall beneath 400 offers, hitting a three-year low. And it stated U.S. VC fundraising will fall between $120 billion and $130 billion in 2023.
Rationale: As of December 1, 2022, the US Unicorn Index has returned 1.0%
YTD, whereas our VC-Backed IPO Index is down 59.1%. This distinction is because of
a number of elements, not the least of which being that just about 200 unicorns have been
created within the US this 12 months. Nevertheless, the tempo of latest unicorn creation, and the
tempo of unicorn rounds on the whole, has fallen precipitously in current months. In
November, fewer than 10 accomplished rounds resulted in a post-money valuation
of $1.0 billion or extra, nicely beneath the 48 accomplished in January, which noticed the
12 months’s month-to-month excessive. With few new unicorn rounds sustaining the recency
bias towards personal values, public comparables will affect unicorn pricing
extra, placing downward stress on the index as the general public market stays
depressed.
Dangers: Whereas it continues to look much less seemingly, a public market turnaround would
push the Unicorn Index into constructive territory. Not solely would growing public
comparable costs put upward stress on personal values, however new unicorns
and new financings for present unicorns would additionally proceed to have a constructive
affect on the index as they’ve in 2022 and 2021.
The Morningstar PitchBook US Unicorn Indexes, which debuted in November, present
perception into the opaque pricing of unicorns, firms with a post-money valuation
of $1.0 billion or extra. The indexes are calculated every day utilizing the newest personal
valuations and adjustments in private and non-private comparable firms.
Arguably a very powerful piece of the pricing mannequin is the newest valuation
of an organization, pinning the worth of a unicorn to its value upon completion of the spherical.
The additional away from that spherical the corporate will get (there’s a roughly 18-month span
between unicorn rounds), private and non-private comparable firms more and more affect
the corporate’s valuation.
Once we take a look at the 2022 US index return of 1.0%, the massive variety of unicorn rounds
all year long has tied many index constituents to their most up-to-date priced spherical,
most of which had been at a valuation step-up. On the identical time, we now have not but seen a
marked improve in personal firm down rounds through the financial slowdown.
In 2022, the median step-up for late-stage valuations has been 2.1x—larger than the
median step-up in 2021. Nevertheless, this determine has decreased quite rapidly all through
the 12 months. The median late-stage step-up in Q3 2022 was simply 1.8x, indicating that personal
valuation development, which might underpin unicorn valuations, are rising at a a lot
slower charge. We anticipate this development to proceed in 2023 as long as the general public market is much less
receptive to high-growth, high-loss firms, as many unicorns are more likely to be seen.
The US Unicorn Index has returned a lot larger than what was seen within the broader
public market or in our VC-Backed IPO Index. Nevertheless, in November simply 9 offers had been
accomplished for a post-money valuation of $1.0 billion or extra. We consider this development will
proceed, doubtlessly falling even additional because the stress created by stagnating worth in
the personal market constrains exercise. We additionally consider that down rounds and additional
slowing of valuation development are more likely to be tendencies in US enterprise in 2023. These elements
will improve the general public market’s impact on the index’s pricing.

Kyle Stanford, CAIA
Senior Analyst, US Enterprise Lead
kyle.stanford@pitchbook.com

3
PitchBook Analyst Word: 2023 US Enterprise Capital Outlook

Outlook: Sequence C and D rounds will see probably the most down rounds, as these
firms are presently probably the most starved for capital.
Rationale: Once we examine the estimated capital demanded by startups to
noticed deal worth in every quarter, we are able to monitor deal exercise dislocations
available in the market. Relative to historic tendencies, all levels have seen a large
dislocation of deal exercise beginning in This autumn 2020, however nowhere is that this extra
pronounced than the late stage. In This autumn 2022, 3.5 instances extra capital was
demanded than the deal worth noticed. This might imply that the late stage
grew to become probably the most overextended through the VC dealmaking frenzy of 2020 and

2021. As these firms grapple with the brand new actuality of upper rates of interest
      and stricter deal phrases, they will be unable to boost at their earlier paces,
      excessive money burn charges, or valuation ranges. Relying on how lengthy it takes for the
      IPO window to open, we may even see these firms lower operations considerably
      to extend runway on the expense of short-term development. If or when these
      firms want extra capital from the personal markets, many should
      increase it at a lowered valuation.
      Dangers: Traders on the capitalization tables of those late-stage firms
      could not need to see their very own investments written down and will are available in
      to assist these firms on the final spherical’s valuation to increase the runway
      of the businesses. Further capital supplied to an organization to maintain it afloat
      can be higher than a failed enterprise. This incidence could possibly be particularly
      prevalent if 2023 begins off with a closely improved IPO market the place traders
      can rationalize extra capital funding in the event that they see a light-weight on the finish of the
      tunnel. Moreover, traders that had been anxious to see a chunk of those extremely
      valued firms may have skimped on due diligence and should have left
      themselves much more uncovered than in regular markets. This might improve the
      incentive to ship good cash after unhealthy, so to talk.
      Within the chart beneath, we plot the estimated capital demand by stage over that stage’s
      noticed deal worth. This could possibly be considered the quantity of demand that was
      fulfilled by the market, or a “tempo of dealmaking” metric. We are able to see beneath that
      firms within the late stage are probably the most capital-starved, with a requirement of three.5 instances
      what was really fulfilled in 2022. Their estimated capital demand has seen the
      least quantity of assist when it comes to noticed deal exercise.
      We estimate the capital demanded by startups utilizing a bottom-up evaluation the place

every deal generates estimates into the long run primarily based on historic deal dimension step-
ups and the distribution of time between rounds on the time of that fundraising. By

reviewing our reported deal worth over time, we now have decided that we are likely to
add 10% of deal worth to the newest quarter on account of a reporting and assortment
lag. Subsequently, we now have added 10% of deal worth to our reported deal worth within the
present quarter solely.
We see the largest development in capital demand relative to deal dimension on the late stage

Alex Warfel, CFA
Quantitative Analysis Analyst
alex.warfel@pitchbook.com

4
PitchBook Analyst Word: 2023 US Enterprise Capital Outlook

as a result of these firms are massive sufficient to place capital to work in a significant
means. Smaller, early-stage firms could not have had the power to increase
operations considerably in a market like that of 2020 and 2021, when capital was
low cost. Nevertheless, this operational growth got here with higher ongoing bills
that required higher funding sooner or later if the income from these operations
couldn’t be transformed into revenue. When the funding market slowed down in 2022,
startups needed to reply with layoffs, capital raises from different sources akin to
enterprise debt, and so forth.

Supply: PitchBook | Geography: US
*As of December 1, 2022

0.0x
1.0x
2.0x
3.0x
4.0x

Q1 Q2 Q3 This autumn Q1 Q2 Q3 This autumn Q1 Q2 Q3 This autumn Q1 Q2 Q3 This autumn Q1 Q2 Q3 This autumn Q1 Q2 Q3 This autumn
2017 2018 2019 2020 2021 2022*

Early-stage VC Late-stage VC Enterprise development

3.5x
2.5x
1.4x

Estimated VC demanded as a a number of of noticed deal worth by quarter

5
PitchBook Analyst Word: 2023 US Enterprise Capital Outlook

Outlook: Seed-stage startup valuations and deal sizes will proceed their ascent,
reaching new annual highs regardless of a slowdown in complete deal worth and rely.
Rationale: Seed-stage startups are extra insulated from public market volatility
than their early- and late-stage counterparts as a result of they’re on the most
nascent levels of the VC lifecycle. Having simply raised their first spherical of
institutional capital, they’re farther away from an IPO and might bide their time
till paths to liquidity reopen. Lately, and extra prominently following

the 2022 financial downturn, traders historically allocating capital to late-
stage startups have moved upstream, concentrating on the sooner stage to seize

bigger returns and safe entry to promising startups. Dramatic reductions
in the price to begin and scale companies, the extended time between startup
foundings and seed rounds, and the growth of members on the seed stage
have contributed to the event of a extra sturdy pre-seed market. This
has led to bigger capital raises and valuations on the seed stage which are extra in
line with historic metrics related to Sequence A or later rounds. Furthermore,
the financial downturn may trigger traders to encourage seed startups to
increase extra capital, which might prolong their runway previous the 18-month
normal and translate to bigger deal sizes at this stage.
Dangers: The frozen IPO market has diverted funding {dollars} historically
dedicated to late-stage firms to youthful startups. Ought to market
circumstances enhance and paths to liquidity return, seed-stage deal metrics could
stagnate or fall in response to bigger verify writers returning to their authentic
funding methods. Seed-stage startups have the next charge of failure and thus
larger funding danger; this might trigger GPs to be cautious of permitting deal sizes
and valuations to proceed growing as a result of extra of their portfolios may
be uncovered to this danger. Moreover, GPs may train stricter due diligence
of startups and restrict seed-stage deal-metric development in an effort to mitigate the
current years’ relaxed due diligence protocols, which have led to unsustainable
valuations hurting late-stage startups and forcing them to think about marking
down their portfolios.
Seed-stage startups are extra mature than they’ve ever been. With a median of two.4
years since founding, they’re practically double the age of seed-stage startups a decade
in the past. Their maturity has contributed to the median seed-stage deal dimension, valuation, and
step-up YTD of $2.8 million, $10.5 million, and 1.9x, respectively, surpassing 2021’s
record-high figures. Amid the tepid public market circumstances and the Federal Reserve’s
(the Fed’s) financial tightening, seed deal metrics have elevated QoQ. Q3 noticed a
record-high median deal dimension of $3.3 million, reinforcing this stage’s insulated nature due
to the prolonged time to an IPO.
Additional supporting the prospect of seed-stage development in 2023 is the massive variety of
micro-funds (funds with lower than $50 million in capital commitments) closed in current
years. Enterprise funds sometimes make their investments over a interval of three to 5
years, so we now have examined the micro-fund fundraising exercise over the past decade,
breaking it into five-year intervals. Within the five-year interval from 2018 to 2022, 1,770
micro-funds have been closed, amassing $24.4 billion in capital commitments. Within the
five-year interval beginning in 2013, 1,280 micro-funds had been closed with simply $15.6 billion in
commitments. The growing quantities of capital allotted to micro-funds in addition to the

Max Navas
Analyst, Enterprise Capital
max.navas@pitchbook.com

6
PitchBook Analyst Word: 2023 US Enterprise Capital Outlook

variety of micro-funds competing for offers have bolstered seed-stage deal metrics in
current years. The micro-funds closed from 2013 to 2017 largely contributed to the 2018
median seed-stage deal dimension and pre-money valuation of $1.8 million and $6.0 million,
respectively. The file highs set by seed-stage metrics in 2022 are due partially to the
growth of micro-fund exercise over the past 5 years, and in consequence we are able to assume
that there will likely be a wholesome variety of micro-funds actively investing on the seed stage in
the approaching 12 months.
Conventional late-stage traders additionally play a major position within the development of seed deal
metrics. Lately we now have seen skilled managers akin to Tiger International,
Greylock Companions, and Andreessen Horowitz decide to investing or elevating $1 billion,
$500 million, and $400 million, respectively, to again founders on the seed stage.1,2,3
The overall want for larger-size funds to write down bigger checks in an effort to preserve their
anticipated return profiles will assist the expansion of seed-stage deal metrics within the
coming 12 months.
Along with late-stage enterprise capitalists launching seed-stage funds, we now have additionally
seen bigger enterprise capitalists improve their participation in seed-stage offers and
driving up the median deal dimension. Utilizing PitchBook’s knowledge, we examined the seed-stage
funding exercise of Accel, Andreessen Horowitz, Greylock Companions, Intel Capital,
Khosla Ventures, Kleiner Perkins, Lightspeed Enterprise Companions, and Sequoia Capital
between 2020 and 2022 and located that the collective participated in 154 seed-stage
investments in 2020 and had already made 208 investments by way of mid-December of

2022. The subset of 2020 seed investments had a median deal dimension of $4.0 million, nicely
      forward of the identical 12 months’s general median seed-stage deal dimension of $2.0 million. By way of
      mid-December of 2022, the median deal dimension had elevated to $6.4 million, additionally nicely
      forward of the general median seed-stage deal dimension of $2.8 million. This exercise lends itself
      to our bullish potential of seed-stage deal-metric development within the following 12 months.

1: “Tiger International Companions Commit $1 Billion for Early-Stage Tech Funds,” The Data, Berber Jin, March 7, 2022.
2: “Greylock Raises $500M for Seeds,” Greylock Views, September 21, 2021.
3: “Introducing a16z’s Seed Fund,” Andreessen Horowitz, August 27, 2021.

Supply: PitchBook | Geography: US
*As of September 30, 2022

$0
$2
$4
$6
$8
$10

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022*

High and backside quartile vary High decile Median Backside decile Common

Seed deal worth ($M) dispersion

7
PitchBook Analyst Word: 2023 US Enterprise Capital Outlook

Outlook: SPAC IPOs and mergers will proceed to say no whereas liquidations will
proceed to extend in 2023.
Rationale: Elevated market volatility has dramatically depressed valuations
in each private and non-private markets and has successfully halted public listings
by way of 2022. This affect has been noticeable not just for conventional IPOs
but in addition for firms trying to go public by way of a SPAC. Rising rates of interest,
which affect client shopping for and borrowing energy and thus earnings for
firms, have challenged the sky-high valuation multiples of 2020 and 2021.
Moreover, growing regulatory scrutiny has negatively affected the first
worth propositions that SPACs supply to non-public firms, akin to the power to
attain public markets quicker than a standard IPO. These elements, amongst others,
have resulted in a pointy decline in SPAC issuance and mixture exercise and
in lots of instances have led to SPAC dissolution and capital returning to traders.
We anticipate these tendencies to be a driving theme in 2023 as turbulent market
circumstances proceed to dampen investor and personal firm curiosity in SPAC
autos.
Dangers: Going public by way of a SPAC can nonetheless be a gorgeous possibility for some
personal firms, and given the massive variety of SPACs which have but to seek out
an acquisition goal, it’s potential that we are going to see an elevated variety of
mergers in 2023. As identified in our newest US VC Valuations Report, deal
worth and rely have decreased considerably for a lot of late-stage firms
and unicorns, demonstrating an issue to boost capital within the personal market.
Accessing public capital by way of current SPAC autos could possibly be a possible path to
funding given IPOs have been practically nonexistent this previous 12 months, although there
will definitely be challenges alongside the best way.
US SPAC exercise has decreased considerably in 2022 amid risky public markets, with
simply 78 SPAC mergers totaling $38.2 billion YTD. Our crew’s SPAC analysis be aware from
Q3 2022 observes that outdoors of the SPAC spike in This autumn 2021, it is a continuation of the
development we now have seen for the reason that finish of Q1 2021. Certainly, SPAC formations are additionally down
with simply 69 SPAC IPOs noticed this 12 months, which is the bottom annual complete we now have seen
since 2019. Given the propensity for SPAC favorability to coincide with constructive market
efficiency, we anticipate these figures to proceed to say no as we head into 2023.
Regulatory and authorized headwinds have additionally contributed to the SPAC decline; most notably,
in Q3 2022, President Biden signed the Inflation Discount Act of 2022 into regulation. The
act included a nondeductible 1% excise tax on the repurchase of company inventory by a
publicly traded US company after December 31, 2022. This excise tax will apply to any
redemption by a US-domiciled SPAC, consequently incentivizing sponsors with no viable
goal in sight to shut store earlier than the 12 months’s finish. We have now already noticed this development
as a number of high-profile SPACs have liquidated this 12 months, together with two from Chamath
Palihapitiya’s funding agency Social Capital. With greater than 450 SPACs presently on
the market with a merger deadline in 2023, half of which with deadlines in Q1 2023, we
anticipate a major improve within the variety of SPAC liquidations by the tip of Q1 2023 as
traders search to recoup their capital and spend money on asset courses higher suited to navigate
the present market setting.
Moreover, public market efficiency of firms which have gone public by way of SPACs

Vincent Harrison
Analyst, Enterprise Capital
vincent.harrison@pitchbook.com

8
PitchBook Analyst Word: 2023 US Enterprise Capital Outlook

will play a task in influencing investor urge for food. Sadly, firms which have
managed to go public by way of the SPAC route have been particularly battered by turbulent
market circumstances; on the time of this writing, PitchBook’s DeSPAC Index reveals a -64.5%
YTD return for public firms which have gone the SPAC route, in contrast with -17.3%
and -29.6% YTD returns for the S&P 500 and Nasdaq, respectively. Whereas not an ideal
proxy for comparability, this sizable distinction, amongst different elements, has curbed SPAC
formation and fundraising. We anticipate SPAC formation to proceed its decline nicely into
2023, contemplating not solely underperformance relative to main public index returns however
additionally growing regulatory scrutiny and general market volatility. Moreover, of the extra
than 450 SPACs nonetheless trying to strike a deal, we anticipate greater than 50% to liquidate and
return money to traders in 2023.

Supply: PitchBook | Geography: US
*As of November 23, 2022

Supply: PitchBook | Geography: US
*As of November 25, 2022

$0.2 $0.8 $1.5 $2.9 $1.8 $7.6 $9.4 $15.9

$87.7 $166.0
10 7 $13.4 11 17 9 29 37 54

229
556

69

0
100
200
300
400
500
600

$0
$50
$100
$150
$200

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022*

Combination submit worth ($B) Deal rely

0%
20%
40%
60%
80%
100%
120%

Dec 2021 Jan 2022 Feb 2022 Mar 2022 Apr 2022 Might 2022 Jun 2022 Jul 2022 Aug 2022 Sep 2022 Oct 2022 Nov 2022*

DeSPAC Index S&P 500 Nasdaq

SPAC IPO exercise

DeSPAC Index versus public market indexes return

9
PitchBook Analyst Word: 2023 US Enterprise Capital Outlook

Outlook: Enterprise development deal worth will fall beneath $50 billion within the US.
Rationale: Our enterprise development dataset showcases the most recent stage of VC and
could possibly be considered a pre-IPO stage of funding. Enterprise development offers
are typically the most important within the enterprise market, with the median deal coming
in at $20.0 million in 2022, double that of the late stage. Being this massive, the
enterprise development stage is closely reliant on nontraditional capital, particularly
from crossover traders, which have rapidly retreated from the opportunistic
enterprise technique they’ve deployed over the previous couple of years. This leaves
the enterprise development stage with a excessive variety of firms and far decrease
capital availability. Alongside this, we could merely see fewer firms wanting

to boost at this stage of VC, as an alternative specializing in sustainable development and cost-
reducing in an effort to steer clear of the troublesome capital-raising market.

Dangers: Just like the dangers related to our Unicorn Index outlook, a public
market U-turn that begins to unlock the excessive worth held by crossover traders
may pull these establishments again into the enterprise market. One of many causes
crossover funding exercise has been so excessive in recent times is due to
the comparatively decrease liquidity danger that VC investments on the development stage have
offered. Greater than 87% of the file $781.0 billion in exit worth generated in
2021 got here from IPOs, which many growth-stage firms might want to notice
returns. There may be additionally a big pocket of capital tied up in SPACs that could possibly be
liquidated and recycled into the enterprise development market.
Our enterprise development stage highlights a small portion of enterprise offers that account
for a a lot bigger portion of capital invested—5.5% of US deal rely and 26.6% of
US deal worth in 2021, to be actual. The $90.9 billion in enterprise development funding
within the US VC market throughout 2021 was a file excessive by a large margin, with the prior
high-water mark being simply $44.8 billion. The capital crunch on the high of the enterprise
market has proven to be particularly difficult for enterprise development in 2022. By way of
November 23, solely $51.5 billion was invested within the enterprise development stage.
The short pullback from crossover traders is problematic for enterprise development
as a result of many offers inside this area, particularly the most important, depend on nontraditional
capital. 80.5% of the enterprise development deal worth in 2021 included participation from
nontraditional companies. Over the previous 5 years, a median of 73.9% of enterprise development
deal worth derived from offers with nontraditional investor participation. The exercise
of those establishments is significant.
In Q3 2022, crossover traders, the most important nontraditional traders, participated in
lower than $12 billion in deal worth, making 211 investments throughout the complete enterprise
panorama. In contrast with the file quarters for every of those figures, each of
which occurred in 2021, that’s $33.0 billion much less and 304 fewer investments. The
risky market has revealed nontraditional investor exercise in VC to be merely
opportunistic. For a lot of nontraditional traders, liquidity danger is excessive. Hedge funds
and mutual funds should stay liquid sufficient to service redemptions (mutual funds
have strict liquidity laws), and the present financial local weather has proven to
make the market much more illiquid than regular.
Once we take a look at our estimate for capital demanded and examine it with our

Kyle Stanford, CAIA
Senior Analyst, US Enterprise Lead
kyle.stanford@pitchbook.com

10
PitchBook Analyst Word: 2023 US Enterprise Capital Outlook

estimate for capital provide for the stage, we see {that a} vast hole has shaped in

2022. This void of funding for enterprise development units 2023 as much as be very difficult
      for firms needing capital. Not solely may they continue to be unable to entry the
      public market by way of IPO, however with out the required provide of capital, which can
      typically be wanted to fund massive offers, it’s extra seemingly that firms that discover
      themselves on the enterprise development stage will expertise down rounds and even failure.

Supply: PitchBook | Geography: US
*As of November 23, 2022

$7.8 $9.6

$17.6 $24.3 $22.0 $19.6 $29.5 $35.8 $44.8 $90.9 $51.5

429
491 542 511 480 526
608
674 720
988
738

0
200
400
600
800
1,000
1,200

$0
$20
$40
$60
$80
$100

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022*

Deal worth ($B) Deal rely

Enterprise development deal exercise

11
PitchBook Analyst Word: 2023 US Enterprise Capital Outlook

Outlook: 2023 US VC mega-round exercise will fall beneath 400 offers, hitting a three-
12 months low.

Rationale: Mega-rounds, outlined as rounds with deal sizes of $100 million or
extra, have change into extra prevalent in recent times with surplus capital and the
excessive variety of traders chasing VC offers. The VC dealmaking setting
of the previous couple of years inspired a growth-at-all-costs mentality, encouraging
startups to return to market faster at larger valuations and search bigger
quantities of capital. Within the wake of the 2022 financial downturn, traders are
presently targeted on the capital effectivity, path to profitability, and justifiable
valuations of startups. This shift in investor mentality, coupled with depressed
public markets affecting late-stage deal metrics and comparables evaluation, will
thwart the mega-round exercise within the coming 12 months.
Dangers: There are near 1,300 privately held unicorns which were unable
go public because of the frozen IPO market. Unicorns in addition to startups which have
beforehand raised mega-rounds are more likely to increase a mega-round in a subsequent
financing as a result of their unprofitable operations could have grown to require
extra massive capital injections to maintain their exercise till an exit. 2021 was
a file 12 months for mega-rounds, and the businesses that raised these rounds will
seemingly must return to market by 2023. Their return may prop up mega-round

exercise. Moreover, 2022 noticed a file quantity of capital consolidate in larger-
dimension VC funds. This consolidation may result in bigger checks being written and

finally improve the whole variety of mega-rounds subsequent 12 months.
Mega-rounds have fallen on a QoQ foundation all through 2022, from 201 rounds in Q1, to
161 rounds in Q2, to 103 rounds in Q3. Contemplating the fourth quarter’s preliminary
knowledge, we anticipate a further 80 to 100 mega-rounds will likely be accomplished, bringing
this 12 months’s annual complete to round 550 offers. Stemming from the stress of public
market uncertainty and frozen paths to liquidity, this 12 months’s mega-round exercise
will likely be a far cry from the 836 mega-rounds noticed in 2021. Utilizing our prior
conjecture, extrapolating 2022’s fourth-quarter exercise, and anticipating an additional
slowdown leads us to anticipate lower than 100 mega-rounds will likely be noticed per quarter,
culminating in a 2023 annual determine of lower than 400.
Most mega-rounds happen within the late stage, so it’s pertinent to look at the current
dealmaking tendencies of startups in that stage. Late-stage deal metrics have fallen nicely
beneath 2021 figures, indicative of the unsustainable development fostered in recent times.
By way of Q3 2022, the median late-stage deal dimension was $11.5 million, a 20.6% drop
from the 2021 full-year determine of $14.5 million. As median deal sizes decline, we are able to
anticipate fewer mega-rounds to happen. The highest-decile late-stage deal dimension was $75.0
million in Q3, a dramatic discount from the file excessive of $143.7 million in This autumn 2021.
Even the highest-performing late-stage offers are getting squeezed, making the
prospect of expansionary mega-round exercise within the coming 12 months unbelievable.
Tandem to the dialog of mega-round exercise is the participation of
nontraditional traders, which overwhelmingly contribute to the expansion of the
largest startups previous to their public listings or different exit occasions. From 2018 to 2021,

nontraditional traders have participated in 91% of mega-rounds and 93% of mega-
spherical deal worth per 12 months on common. By way of Q3 2022, nontraditional traders

Max Navas
Analyst, Enterprise Capital
max.navas@pitchbook.com

12
PitchBook Analyst Word: 2023 US Enterprise Capital Outlook

participated in mega-rounds with deal worth totaling $88.5 billion, considerably
lower than the $181.9 billion in mega-round deal worth they participated in final 12 months.
Nontraditional traders supply a needed capital supply to assist startups exceed
deal sizes of $100 million. If nontraditional traders scale back their funding in VC
markets, mega-round exercise will fall. We anticipate nontraditional investor participation
to shrink additional within the coming 12 months, limiting the variety of startups that may
efficiently increase mega-rounds.
Lastly, it is vital we deal with the dangers of the plethora of startups that raised
mega-rounds in prior years doubtlessly returning to market in 2023 to boost once more.
Utilizing PitchBook knowledge, we examined the median time between rounds for startups
which have raised mega-rounds and noticed a median between 1.0 and 1.2 years from 2019
to 2022. Based mostly on this, we are going to deal with startups that raised mega-rounds final 12 months,
as they’ll seemingly must return to market quickly in the event that they haven’t already. Of the 832
startups that raised mega-rounds in 2021, 104 already returned to market this 12 months,
that means fewer of these startups might want to return in 2023. Because of the harsher VC
setting, we anticipate a good variety of the remaining startups to think about enterprise
debt to complement their want for fairness financings. Startups that choose to boost enterprise
debt may reduce the burden on elevating fairness; for instance, if a startup had been to
safe $50 million in fairness and tackle $50 million in enterprise debt, their financing
spherical wouldn’t present up as a mega-round regardless of having mega-round capital. In the event that they
are unable to safe enterprise debt, they might resort to down rounds with deal sizes
lower than $100 million, search out acquirers to generate a liquidity occasion, and even exit
of enterprise. Consequently, we’re skeptical of the continued development of mega-round
exercise within the coming 12 months and forecast fewer than 400 rounds closing.

Supply: PitchBook | Geography: US
*As of September 30, 2022
0
50
100
150
200
250

$0
$10
$20
$30
$40
$50
$60

Q1 Q2 Q3 This autumn Q1 Q2 Q3 This autumn Q1 Q2 Q3 This autumn Q1 Q2 Q3 This autumn Q1 Q2 Q3 This autumn Q1 Q2 Q3
2017 2018 2019 2020 2021 2022*

Deal worth ($B) Deal rely

VC mega-round deal exercise by quarter

13
PitchBook Analyst Word: 2023 US Enterprise Capital Outlook

Outlook: US VC fundraising will fall between $120 billion and $130 billion in 2023.
Rationale: Regardless of US VC fundraising reaching a historic excessive in 2022, we anticipate
a slowdown to happen in 2023 as LPs grapple with liquidity issues and take into account
various investments in different asset courses positively affected by rising
rates of interest. Declining public fairness valuations can create a “denominator
impact” for a lot of LPs, akin to endowments, pension funds, and sovereign
wealth funds (SWFs), whose enterprise asset holdings change into too massive relative
to different asset courses outlined of their mandates. Our in-depth methodology
for this phenomenon might be discovered right here. Declining public market valuations additionally
create a further liquidity crunch for a lot of LPs, as public fairness markdowns
scale back the capital they will anticipate to obtain as lockup intervals for current exits
expire. Rising rates of interest, that are largely guilty for the downward development
in fairness valuations, have additionally created lower-risk alternatives for LP capital
in different asset courses, taking much more consideration away from personal market
fundraising.
Dangers: Allocations to enterprise property inside an LP’s portfolio sometimes signify
a small general proportion; subsequently, massive reductions in allocations could
not happen. Moreover, as identified in our Q3 2022 International Non-public Market
Fundraising Report, established fund managers with profitable monitor information,
particularly those that have accomplished nicely regardless of poor market circumstances, have had
nice success in capitalizing on LP curiosity; globally, 68.4% of complete VC raised
went to established managers in 2022, in contrast with 58.3% and 54.9% in 2021
and 2020, respectively. This upward development illustrates the chance for bigger,
established fund managers to extend their market share of energetic LPs with
versatile allocation mandates in 2023.
The exit setting of 2022 has been torpid relative to earlier years, with
simply $63.4 billion in exit worth generated YTD (not together with Adobe’s acquisition
of Figma, which is predicted to shut in 2023), a major decline from final 12 months’s
file of $781.5 billion. As mentioned in our most up-to-date PitchBook-NVCA Enterprise
Monitor, this 12 months’s complete exit worth, which we anticipate to be the bottom since 2016,
is an actual explanation for concern as a result of the dearth of liquidity pushed by the slowdown in
exit exercise may discourage LPs from recycling capital into the VC ecosystem.
Even in instances the place VC valuations could stay steady or are marked up, ensuing
in unrealized positive aspects, money returns to LPs finally dictate the place future {dollars} are
allotted, together with to current capital commitments or into new funds.
Moreover, sturdy markdowns in public markets have lowered the quantity of
capital returns that endowments, pensions, and SWFs can anticipate to obtain if
and once they select to promote shares from current exits whose lockup intervals have
expired. The dearth of realized worth relative to 2021’s file exit worth era
is more likely to trigger a capital crunch for a lot of LPs, and this discount in capital places
a pressure on current liquidation mandates, so there’s more likely to be some hesitation
when contemplating recycling any out there money into the comparatively illiquid VC
market. Given the continuing uncertainty round public market circumstances, we anticipate
the quantity of capital commitments from these traders to proceed to say no
in 2023 as these companies look to fulfill liquidity laws and different mandates
outlined of their investor coverage statements.

Vincent Harrison
Analyst, Enterprise Capital
vincent.harrison@pitchbook.com

COPYRIGHT © 2022 by PitchBook Information, Inc. All rights reserved. No a part of this publication could also be reproduced in
any kind or by any means—graphic, digital, or mechanical, together with photocopying, recording, taping, and
data storage and retrieval methods—with out the categorical written permission of PitchBook Information, Inc. Contents
are primarily based on data from sources believed to be dependable, however accuracy and completeness can’t be assured.
Nothing herein must be construed as funding recommendation, a previous, present or future advice to purchase or promote
any safety or a suggestion to promote, or a solicitation of a suggestion to purchase any safety. This materials doesn’t purport to
include the entire data {that a} potential investor could want to take into account and isn’t to be relied upon as such or
utilized in substitution for the train of unbiased judgment.

14
PitchBook Analyst Word: 2023 US Enterprise Capital Outlook

Rates of interest have marched upward for many of 2022 because the Fed continues its
most aggressive set of charge will increase for the reason that Eighties. Whereas these charge will increase
have been the first explanation for fairness valuation declines in private and non-private
markets, they’ve inversely created a safer means for traders to lock in constructive
returns in different asset courses. As of December 6, 2022, the benchmark 10-year
Treasury yield completed at 3.5%, whereas the two-year Treasury yield—which is even
extra delicate to near-term Fed coverage adjustments—completed at 4.4%. These figures
are among the highest we now have seen for the reason that 2007-2008 International Monetary Disaster.
Contemplating the truth that larger yields translate to falling bond costs, and better
risk-free charges improve the return wanted from VC investments, it’s seemingly we are going to
see traders allocating extra capital to fixed-income devices as a lower-risk
path to money returns. Doing so would theoretically scale back the quantity of capital
allotted to different various, illiquid asset courses, akin to VC, thus additional
lowering fundraising ranges in 2023. Nevertheless, it is very important be aware that many
traders predict a recession is on the best way, which may ultimately lead the Fed to
halt charge will increase or decrease them solely, subsequently lowering the attractiveness of
such a technique.