Dealmaking Frenzy Slows as Investors Set Higher Bar

The pace of venture-capital investment has dramatically slowed this year as investors wait for the right opportunities.

Generally, valuations have remained steady, but exit activity is down almost 50% against historical norms, and public listings are at record lows. Seed- and early-stage, pre-money values remain at levels seen in 2021, and in some cases have ticked up slightly. Late-stage valuations have started to correct.

These late-stage valuations represent more mature companies that resemble public-stage companies to a greater extent. Logically, they are more directly impacted by the public equity market changes.

After surging in 2021, funding activity declined in each of the first three quarters of 2022, with third-quarter (Q3) levels in line with 2020, pre-pandemic levels. For seed-stage financings, Q3 had the lowest deal count since 2016.

A common refrain heard from venture partners is that fewer deals mean more time to perform diligence on potential investments. This also means that the bar for investment is rising as investors look for companies with not only promising growth prospects but proven capabilities and achievements. Good ideas will still get funded, but riskier plays will struggle for financing.

Eventually, valuations will follow the public markets down and find convergence as all markets stabilize. This does not mean the opportunity to invest is over. The next generation of innovation will drive the next wave of returns. For now, investors need to be discerning. Finding those ideas can take time but can also be rewarding.

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