The global venture capital market slowed in Q1 — but not as much as you might have expected


Image Credits: Nigel Sussman (opens in a new window)

Can’t stop, won’t stop.

That’s what early data appears to say about the global venture capital market in Q1 2022. New data released by Crunchbase News1 this morning paints the picture of a market slowing, but hardly stopped.

In comparative terms, the dataset shows that the global venture market in Q1 2022 was in fact larger in dollar terms than its year-ago comp. However, compared to the fourth quarter of 2021, it marked a decline – the first in some quarters of record-setting venture totals.

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The Exchange, and TechCrunch+ more generally, will explore the global VC market from a number of perspectives in the coming days. Data from the usual suspects – Crunchbase, PitchBook, CB Insights, venture associations, and startup-servicing banks – will fill in today’s partial image of the state of the world.

A fall in venture capital investment in the first quarter is not a surprise, even if the decline is modest and only in existence on a quarter-on-quarter basis. A decline in the value of technology stocks starting in the final months of 2021 helped sour the mood among investors private and public about the value of technology companies. What was once the hottest sector in the world cooled somewhat – leading to an anticipated retrenchment in venture activity.

The stakes are high, mind. If the venture market slows more in Q2, the number of startups that could find themselves hunting for capital in a market that doesn’t agree with their past valuations could skyrocket. And if that happens, the exuberance of 2021 could become the hangover of 2022.

Let’s explore data concerning early-stage and late-stage activity and what’s left of the exit market. Then we’ll explore how the data does – or doesn’t – match our expectations from interviews and news events from the first quarter.

Our old enemy — the lag in venture capital data — could be at play in the results. So we will ask ourselves at the end of our work today whether we expect the second quarter to be even more conservative than the picture we’re starting to sketch of Q1 VC activity.

Where venture is slowing the fastest

Normally we’d pay more attention to year-over-year results than those set in sequential quarters when we compare venture capital results. But in the wake of 2021’s venture capital party, it’s actually more reasonable to compare periods in temporal order. Why? Because things changed so much last year for the venture capital and startup worlds that comparing against year-ago results is a bit more apples:oranges than looking at successive quarters.

But we’ll still do both, for the sake of completeness. Per Crunchbase News, here’s how the data looks:

  • Seed: $10.3 billion in Q1 2022, flat compared to Q4 2021 and up 45% from Q1 2021
  • Early-stage: $51.9 billion in Q1 2022, down 18% from Q4 2021 but up 21% from Q1 2021
  • Late-stage: $97.9 billion in Q1 2022, down 12% from Q4 2021 and flat compared to Q1 2021

Seed funding, then, had the best first quarter, which matches our expectations; The Exchange saw myriad signs that early-stage investing remained fun-filled in the first quarter, including expensive prices for Y Combinator graduates in March. Early-stage financings did better, slipping some compared to their end-of-year results, but still up more than a fifth from their year-ago comp. Later-stage startups merely managed a flat year-over-year tally.

The way that we read the above information is somewhat simple: Compared to Q4 2021, no startup stage did better, per Crunchbase data, and two did worse. Things are in decline from all-time highs. And, compared to Q1 2021, no startup stage did worse and two did better. This indicates that while the venture capital market is slowing from its apex moment set in 2021, it’s hardly in the dumps.

Unlike exits! Heyo! Crunchbase News correctly notes that exits have slowed as the IPO market has frozen. But we knew that, yeah? Let’s move along and dig into the why behind the venture data.

More to come?

The starting point of this slowdown is very much rooted in macroeconomic conditions. With inflation making a return and interest rates on the rise, investing in startups – whether publicly or privately – is just not as attractive as it was a few months ago. Add in the uncertainty of war, and it would be easy to interpret this slackening as being caused by factors extrinsic to tech, and therefore transient.

However, there are also factors at play that are very much tied to how the startup sector behaved in the last few quarters. If you have been reading TechCrunch and especially this column, you already know this: Investors kept on cutting ever bigger checks to private startups at huge multiples, causing a unicorn stampede, all while similar public tech companies were underperforming post-IPO, and even more so when they had SPACed.

We shouldn’t get ahead of ourselves, though. The data we are looking at provides some perspective: As we mentioned, venture funding in Q1 2022 was still higher than the same quarter in the year prior, and we haven’t gone back to pre-2021 levels in terms of dollars invested – at least, not yet.

Are we in for a correction? We think so. To what levels? It depends on whom you talk to — and when they think private investors started becoming careless.

In a recent episode of the “All-In” podcast, Altimeter Capital’s Brad Gerstner referred to the “historic Red Bull high that we were on during most of 2020 and 2021.” This went beyond being merely bullish; it led many VCs to skip regular due diligence. Some even gave up on the very terms that would protect them against dilution in the event of down rounds or IPOs priced under the last private valuations – all of which we expect to witness by the end of this year.

If we had to point out a sign of what’s to come, we’d name Instacart’s decision to slash its valuation by roughly 38.5%, from around $39 billion to $24 billion. Being proactive might be the right thing to do in this environment; wait any longer, and it might be someone else doing the markdown, which could be a lot more painful. And unfortunately, it’s often employees who pay the price. We are very much not looking forward to covering layoffs, but the word is already on everyone’s lips.

  1. Semi-regular reminder that Alex worked for Crunchbase for a few years, helped build Crunchbase News, and remains a shareholder in the parent company.

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