Brian Walsh
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A recent article on Bloomberg asserts that venture capital activity is on the verge of collapse, but I don’t believe this is the case.
This narrative falls short when you consider data that goes back beyond 2021. In the U.S. and globally, VC activity in 2022 is well on track to exceed a long-term trend that started in 2006 for total amount invested. Instead of a collapse, the data suggests a healthy “reversion to the mean” following an astonishing and historic hype cycle in 2021.
More volatility
The macro environment changed in 2022, and three major trends drove downward near-term trends.
First, inflation soared as COVID stimulus money drove up demand. Then. lockdowns and Russia’s war on Ukraine placed further pressure on an already strained global supply chain.
Second, since January 2022, global equity and VC markets have become more volatile as investors regroup to tackle a more expensive capital environment where the path to profitability gains importance.
Finally, as higher interest rates try to tame inflation, fears of recession grow and slow the pace of investment. All of this tends to depress the value of venture capital portfolios, and funds will typically shore up their investment reserves, leaving less money available for new investments.
Focusing on a narrow slice of the VC pie
These dynamics are causing some to assume that venture capital is collapsing or stalled, or that later-stage growth equity is essentially dead. Headlines are highlighting the fact that deal values have plunged to their lowest in six quarters or that quarter-on-quarter or year-on-year growth is down significantly.
Yes, compared to last year, there are 43% fewer new unicorns this year across the world, and funding from corporate venture capital sources is down 32%. Moreover, we have 42% fewer mega-rounds, which has pulled down total deal values by 29%.
But we need to take a step back and get some perspective. Venture capital activity in 2021 was nothing short of astonishing. Huge VC funds with reserves of $100 billion-plus leaned in big time, as did the sector in general. In 2021 alone, Tiger Global led 335 deals worth $29 billion, and SoftBank led 160 deals worth $35 billion. Globally, venture capital deal value was up over 100% compared to 2020 or even 2018. It was simply a historic year for venture capital.
But massive write-ups can only be followed by massive write-downs when the market softens. And inevitably, some of these write-downs become public knowledge given how some of the biggest VC funds are structured, and they’re reported as “losses.”
Much of the “collapsing” venture capital narrative stems from sensationalizing this narrow slice of the global VC industry as carnage. The reality is that there was an unprecedented hype cycle in 2021, and what we have seen since the beginning of 2022, objectively, is a “reversion to the mean” in line with long-term trends.
How corporate venture capital may adapt
We’ll see corporate venture capital (CVC) adapt in many ways to the new environment and the slowdown. It is likely some CVC firms will disappear due to lack of support from their corporate parents or lack of performance. We’ve already seen some of these funds close down publicly, but it is likely many more will end quietly.
But new CVCs will form. Some corporations will finally realize how important startups are to the future of most industries given what we witnessed during the pandemic and that it’s best to invest during difficult times. They might even start, strengthen or professionalize a startup investing program.
Other corporations will double down and expand their existing CVC efforts to take advantage of the market’s general weakness.
But many CVCs will remain unchanged, which likely also benefits CVC’s reputation as reliable, steady capital.
What’s happening in LatAm?
All of this is true for markets everywhere. In Latin America and the Caribbean, average deal value was $5 billion in 2019 and 2020 and skyrocketed to $20 billion in 2021. In the first half of 2022, deal value is already at $5 billion, matching 2019 and 2020 even with less than half of the year remaining. As with the global or U.S. numbers, it is difficult to defend the narrative that VC is collapsing in 2022.
Healthy and on track
As with any trend analysis, it is important to look at the big picture and avoid sensationalizing specific subsectors of an industry. It is also vital to analyze long-term trends. The VC industry at large is as vibrant and healthy as ever, and it is on track to continue growing on many fronts.
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