After a smooth ride for the last decade this year has brought profound change to the venture capital world. While we have anticipated a decline in valuations of companies that currently seek funding, the scale and depth of the repercussions from listed markets spilling over to private markets has been unprecedent in the past years.
As we are rounding up our year-end market outlook, several questions arise:
Are we witnessing a simple flight to safety and quality?
Are we in a longer-term decline in liquidity within private markets translating into less available funding for ventures and venture investors alike?
Has the irrational exuberance of the market damaged investor sentiment and nudged institutional and private asset allocations into liquid asset classes – trading off potentially higher risks and returns profiles of private equity and venture capital?
Reality is that market volatility continues to persist driven by inflationary pressures, rising interest rates, a strong dollar, and recessionary fears. To no one’s surprise, the effects of this strong cocktail are strongly affecting the market – and investors are saving their money for the time ahead. They have built up a mighty arsenal: While there is still substantial dry powder on record levels available, Global Q3’22 VC funding is down 34% Quarter-over-quarter witnessing the largest quarterly percentage drop in a decade.
Fun times are over. Even highly attractive companies struggle to raise essential funding. Less capital deployed to VC funds has resulted in nearly a proportional 36% Quarter-over-quarter drop in European funding and 40%+ drop in median deal size, especially for late-stage rounds. From today’s perspective, 2023 will be a tough environment to navigate for investors and companies alike.
Nevertheless, as seasoned venture investors we learned of the past decades that adversity breeds champions. The best companies will continue to attract the capital required for successfully scaling from early to late-stage. That is why we are determined to invest into emerging winners that are primed to benefit from a rebounding economy within the next three to five years. Investors' seatbelts are certainly fastened.
