The comedown from venture capital’s torrid 2021 is sparing few startups.
New data from Carta, a provider of shareholder management services to private companies, indicates that the slowdown in venture capital activity is not constrained to a single stage or sector. Instead, aggregated information detailing a host of Q1 2022 data points from Carta’s Head of Insights, Peter Walker, indicates that even less mature startups will not prove immune from a retreat in private market investment.
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The value of technology stocks began to decline in late 2021, a slide that continued into 2022, leaving many tech shops trading at a stiff discount to their recent valuation highs. Given that late-stage startup valuations are the most easily compared to those of public companies, it was expected that growth-stage investors would shake up their pricing models and perhaps reduce their risk appetite.
Earlier-stage startups were expected by some to fare better than their later-stage brethren. However, the impacts of public-market valuation changes — repricing forecasted exit values for startups, which can change their value in private investment rounds — are trickling down more than some expected. (TechCrunch explored part of this phenomenon over the weekend.)
And while there is talk among investors regarding how expensive some very early-stage rounds are, from seed on up, it appears that no startup is safe from the slowdown’s effects.
Measuring the slowdown by series
Measuring the impact of a slowdown is harder when it comes to private companies. By definition, their financial information is private, meaning that we can’t know much about their revenue, margins and varying profit metrics, which, in the case of pre-revenue companies, wouldn’t be very terribly pertinent anyway.
This makes Carta’s data particularly relevant for us: It provides us with the number of rounds and total capital raised by series for startups in the first quarter. The caveat is that the data only covers startups using the platform, but we haven’t singled out a factor that makes them necessarily different from their counterparts who don’t use Carta.
Let’s take a closer look at the data before unpacking what it means. The number of rounds by series on Carta:
- Seed: 721 rounds in Q4 2021, 428 in Q1 2022, down 41%.
- Series A: 756 rounds in Q4 2021, 387 in Q1 2022, down 49%.
- Series B: 365 rounds in Q4 2021, 213 in Q1 2022, down 42%.
- Series C: 147 rounds in Q4 2021, 99 in Q1 2022, down 33%.
- Series D: 60 rounds in Q4 2021, 44 in Q1 2022, down 27%.
- Series E-H: 63 rounds in Q4 2021, 31 in Q1 2022, down 51%.
This clearly shows that every stage was hit when it comes to deal-making volume. This was a surprise given that we expected more impact in the later stages than the earlier. Who would have thought that the number of Series A deals would decline more sharply than Series Ds in Q1? We know that there’s always a lag in deal reporting, and this tends to disproportionately affect earlier stages, but the gap is such that that can’t be the whole explanation. Clearly, deal volume is trending down.
Dollar volume is down as well, Carta numbers reveal. Here’s how Q1 2022 compares to Q4 2021 in terms of total capital invested by series on Carta:
- Seed: down 31% from $2.62 billion to $1.81 billion.
- Series A: Down 58% from $11.27 billion to $4.68 billion.
- Series B: Down 52% from $15.40 billion to $7.34 billion.
- Series C: Down 43% from $10.30 billion to $5.88 billion.
- Series D: Down 37% from $7.76 billion to $4.87 billion.
- Series E-H: Down 57% from $9.39 billion to $4.08 billion.
Again, seeing Series A more affected than Series D rounds wasn’t in our cards, but that’s why these numbers are useful.
It is tempting to finely parse the nuance of different series results, but because Carta cautioned us that a few more data points should trickle into its dataset, doing so would be a mistake. What matters more is simply how pervasive declines in deal and dollar volume proved in the first quarter, no matter the maturity of the startups in question.
A broad slowdown across sectors
Carta also provided us with seed to Series C data broken down by sector, which is very revealing. It confirms how broad the slowdown is: The number of rounds is down in most verticals at all stages — from early-stage fintech to Series C SaaS.
There are only two exceptions to the deal volume decline: edtech and health tech Series C rounds. But for edtech, the difference is only that there were three deals last quarter instead of one in Q4 of last year, so we’re discussing a very modest change. And more importantly, we are looking at two sectors that benefited from very strong tailwinds during the pandemic. That some companies are going on to raise Series C rounds is logical and tells us more about the past than the future.
The future of health tech and edtech is better captured by seed-stage data, and it’s not looking as rosy. Total seed capital raised on Carta by health tech startups fell from $220 million to $130 billion quarter over quarter. As for edtech, the drop is even stronger, from $40 million to $10 million.
Comparatively, fintech is holding up better, at least among Carta-tracked startups, with $210 million raised across 43 seed deals, compared to Q4’s $240 million tally from 66 deals. SaaS is also bucking the slowdown better than we’d have expected, with $1.04 billion raised in Series A deals, only 38% less than in Q4 2021 ($1.70 billion.)
As we work to close out our Q1 coverage, what happens in the second quarter is now top of mind. What is clear is that heading into this quarter, the startup venture capital market was slowing. If that deceleration persists, it could set the tone for the rest of the year. Let’s see.