US VCs have raised a record amount of money – and they are hanging onto it

US venture funds sitting on a record $290bn in dry powder pumped the brakes on dealmaking in the second quarter.

Fundraising by US venture capital funds continued to post record numbers in the first half of 2022, but sharp declines in exits and the amount of capital going into deals indicate that potential weakening in sentiment among VC investors will bear close attention in the quarters ahead.

That’s one of the key takeaways from the Q2 2022 PitchBook-NVCA Venture Monitor, released today by PitchBook and the National Venture Capital Association.

Although deal count remained strong, the total capital going into deals declined significantly across all fundraising stages compared with the highs of 2021. A more cautious approach from investors was apparent in a slowdown of the mega-sized deals that defined 2021.

Notably, the sputtering economy has not resulted in lower valuations for start-ups. The median pre-money valuation for a late-stage deal is currently about $105 million, compared with $100 million last year. Likewise, early stage deals currently carry a median pre-money valuation of about $60 million (compared with $45 million last year) and the median pre-money valuation for seed-stage deals is about $12 million (versus $9 million in 2021).

Plenty to spend

With more than $290 billion in dry powder, and nearly 3,000 funds having closed since the beginning of 2019, the trend toward steady deal counts is likely to be extended while readjusted pricing continues until certainty returns to the market.

More than $100 billion raised by US fund managers in the first six months of 2022 make it “the second highest year on record already [with much of this] due to the closing of multiple billion dollar-plus funds as name brand and established fund managers really consolidate their place in the venture capital market,” PitchBook venture analyst Cameron Stanfill said in a video statement.

Between January and the end of June, PitchBook and the NVCA tracked $121.5 billion closed across 415 funds, making 2022 the second consecutive year that total fundraising has exceeded $100 billion. First-time funds had a more difficult start in 2022, with only $7.6 billion raised, after new managers hauled in a record $16.8 billion last year.

“We do expect some continued problems for first-time and emerging managers as they go through and try to navigate this uncertain market and communicate with LPs,” Stanfill said.

Seed-stage investments – generally furthest from the public markets – have been relatively insulated from economic volatility versus the rest of the industry. The Q2 seed deal count of 1,104 (worth a total of $3.9 billion) is near the highest figure in the dataset.

There was additional pressure on early-stage VC activity in Q2 with roughly $16 billion invested across an estimated 990 deals, down sharply from $24 billion invested in an estimated 1,360 deals in the previous quarter. To put Q2 into perspective, US VCs invested just $8.4 billion in 701 deals in Q2 2020 at the height of the pandemic.

Slowdown in exits

Mergers continued to slow from the first to second quarter, but IPOs skidded nearly to a stop. Just 42 VC-backed IPOs were completed from January through June, with just 11 in the second quarter. That’s down from 298 for all of last year.

Most concerning is the decline in the potential for billion-dollar exits, as IPOs have historically been the main source of liquidity for private companies of that scale. What also makes this decline slightly worrying is that VC-backed IPOs have previously had an outsized positive impact on the US public markets.

With public listings halted for now, private companies may increasingly rely on strategic acquirers as a more viable liquidity option, although exit value expectations will be readjusted to align with overall repricing occurring across the ecosystem.

The number of mergers totaled just 202 in the second quarter, down from 259 in Q1. Both of those numbers are lower than last year’s quarterly average of 290 M&A deals, according to Venture Capital Journal’s analysis of exit data.

“The VC exit market has felt the sharpest decline so far in 2022 in response to the public market volatility we’ve seen over first half of the year,” said PitchBook senior venture analyst Kyle Stanford in a video statement. The handcuffing of venture-backed IPOs puts activity on track to record roughly a decade low, he added.

“Acquisition activity has been relatively stable, but again that’s a little on the lower end of the market – smaller deals, earlier-stage deals. So there is a bit of concern about the top end of the market about where these unicorns and highly valued companies are going to find liquidity for their LPs,” Stanford said.

He noted incredible resilience in the VC market in the first half of 2022 despite the economic headwinds that global markets are facing: “2021 was such an outlier year in all aspects of venture that 2022 was set to be the second-highest year for deal count at each stage within the market.”

So many funds have been raised in the past four years and “so much capital is set to be deployed that the markets are still kind of chugging forward even amidst the uncertainty that the capital markets are facing,” Stanford added.

While market tightening continued as expected in some parts of the US venture ecosystem during Q2, a record amount of dry powder continues to fuel critical innovation that is addressing the country’s important needs, NVCA president and CEO Bobby Franklin said.

“The venture industry’s long-term view of investing, even during uncertain fiscal times, is further proof it is a reliable economic engine with an eye toward funding the next generation of great American companies,” he noted.