Here we are still talking about 2022, although in a way makes all the sense in the world. The last quarter of the year was one of transition, which is the stepping stone between the big drops in Q3 and what is about to happen.
Let’s say it clear and sound, 2022 was the first time since 1969 that the S&P 500 and the Bloomberg US Aggregate Bond Index both ended in red numbers.
As always, the early-stage and seed deals were the ones that suffered in the last quarters of the year.
Even though there are many reasons to be pessimistic about the market right now, opportunity rises for founders who are developing innovative and profitable companies.
According to the Q4 2022 venture capital report from TheVentureCity, a VC fund for early-stage startups with offices in Madrid, San Francisco, Sao Paulo, and Miami that invests in founders based on data analytics, we are facing a once-in-a-decade opportunity for patient investors with dry powder.
If also take into account the fact that many market incumbents are likely to fail, while at the same time tremendous progress in areas such as AI (just to name one), we are talking about a perfect storm of true disruption.
The new VC sentiment
It seems Q4 2022 made VCs worldwide shift priorities and workflows. Data from Pitchbook points out that funding volume and deal count contracted to $52.5B across 5,683 deals (-23% QoQ decline, -57% YoY drop), VC-backed exit volume in Q4 slowed to $5.2B, a 10-year quarterly low, while 2022 recorded the highest amount of capital raised by venture funds ($163B).
According to TheVentureCuty report what happened is that VCs were supporting their portfolios operationally, prolonging runway through extension rounds to survive until more favorable market conditions materialize.
Andrés Dancausa, General Partner of TheVentureCity, adds that the inferences drawn from this situation are relatively clear.
“VCs have withdrawn from the market for a multitude of reasons and have instead focused on their existing portfolios. They are planning to deploy capital in large sums in the coming years, but are waiting for the storm to pass before doing so. We will likely see increased IPOs and M&A as indicators of more optimistic equity capital market conditions, but those will be predicated on investors rotating out of interest-bearing assets (debt) into riskier assets”, says Dancausa.
Europe in the equation
Even when European deal volume dropped, capital commitments continued to pour in, suggests the TheVentureCuty report.
According to data from Pitchbook, European startups suffered in Q3 and Q4 of 2022 compared to prior quarters, although the same cannot be said for European VC funds. Fewer funds raised a record amount of capital last year: 212 funds raised €25.4B, an average of €120M/fund.
2021 set a record at the time with European funds raising €25.3B, but the average fund size was less at €83M/fund.
For Dancausa, this creates an interesting narrative: despite different startup fundraising environments, VC funds have still been able to attract LP commitments at increasing rates.
Spain finds resilience
Although Spain saw flat funding QoQ and larger deals, still was one of the few geographies immune to disruption in the VC funding markets, according to TheVentureCity report.
The data gathered from Pitchbook shows that dollars deployed remained relatively flat at $681M across 120 deals compared to Q3’s $677M.
However, Q4 produced an average deal size of $5.7M, up from $5.3M/deal in Q3 and $3.8M/deal in Q2.
“This continued trend shows Spain remains a resilient and fertile region for startup activity where investors have shown continued interest in deploying capital”, adds Dancausa.
The general conclusion from Q4 is that the markets have experienced a great reset. In other words, a washout was necessary. And the overall hope is that in bear markets like the ones we are experiencing right now, with fewer distractions, more efficient and profitable startups will emerge.