As the economy has deteriorated, non-traditional investors have pulled back from the venture capital (VC) space and the initial public offering (IPO) market has cooled.
Combined, these factors have put a strain on the VC market, PitchBook analysts told BetaKit during an interview at the Collision Conference in Toronto.
There is still “a huge spread” between what many companies are willing to pay and the price acquisition targets are willing to stomach.
Many non-traditional VC investors entered the space during the low-interest rate environment of years past, which helped fuel the 2021 VC funding and IPO boom. “As things have broken down in public markets, those investors were the first to take flight and focus on putting out the fire in their public portfolios,” said PitchBook VC analyst Vincent Harrison.
PitchBook senior analyst of VC Kyle Stanford noted that amid these conditions, late-stage, venture-backed tech firms have had a particularly tough time. “No exit opportunities, very little capital availability,” he said. “Those are the companies that are struggling to raise.”
PitchBook data indicates that there is a backlog of about 450 companies globally that should have gone public but haven’t been able to do so.
According to PitchBook’s deal indicator, the current venture market is also the most investor-friendly it has been in years. Market conditions have made financings more complicated with terms and valuations that favour investors more than investees.
Harrison noted that it is also currently an “acquirer-friendly” market. “There’s this saying going around now that a flat round is kind of a new up round,” he said, arguing that companies that can sell today at either the same or a similar valuation to their last fundraising in 2021 or early 2022 are probably achieving a good outcome in this environment.
Most mergers and acquisitions lately have been relatively small, noted Stanford, who added that there is still “a huge spread” between what many companies are willing to pay and the price acquisition targets are willing to stomach.
On the early-stage front, Harrison noted that while startups at this level experienced some headwinds in late 2022, the funding slowdown was less pronounced than it was for late-stage firms. Now, he said, emerging firms are feeling the burn to a higher degree.
“Early-stage companies may be more insulated, but they are not immune from the challenges, and I think a lot of those challenges are starting to catch up [to them],” said Harrison.
On the VC side of the equation, as public market conditions have worsened, limited partners (LPs) have also pulled back, making it more difficult for VCs looking to close funding.
“At a very broad level, funding for this year is pretty much shot,” said Stanford, who noted that lots of VC firms have pushed out their fundraising timelines until 2024. Many LPs who over-allocated towards VC in previous years are pausing or decreasing their investments in the asset class as they have sought to rebalance their broader portfolios.
According to Harrison, much of the capital that has been put into VC funds during the downturn has been concentrated on established rather than emerging fund managers. “For LPs that are willing to allocate, they’re going for more experienced VCs with longer track records and returns they can speak to,” he added.
Despite some positive signs recently indicating that the state of play is on its way toward improving, Stanford and Harrison both believe that it will still take some time for the overall VC market to rebound—let alone reach its previous highs.
“It’s not going to be a six-month turnaround,” said Stanford. “It’s not going to be a year-long reallocation. It’s going to be a long-term [recovery].”
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