A recent article on Bloomberg asserts that venture capital activity is on the verge of collapse, but I don’t believe this is the case.
This narrative falls short when you consider data that goes back beyond 2021. In the U.S. and globally, VC activity in 2022 is well on track to exceed a long-term trend that started in 2006 for total amount invested. Instead of a collapse, the data suggests a healthy “reversion to the mean” following an astonishing and historic hype cycle in 2021.
The macro environment changed in 2022, and three major trends drove downward near-term trends.
First, inflation soared as COVID stimulus money drove up demand. Then. lockdowns and Russia’s war on Ukraine placed further pressure on an already strained global supply chain.
Massive write-ups can only be followed by massive write-downs when the market softens.
Second, since January 2022, global equity and VC markets have become more volatile as investors regroup to tackle a more expensive capital environment where the path to profitability gains importance.
Finally, as higher interest rates try to tame inflation, fears of recession grow and slow the pace of investment. All of this tends to depress the value of venture capital portfolios, and funds will typically shore up their investment reserves, leaving less money available for new investments.
Focusing on a narrow slice of the VC pie
These dynamics are causing some to assume that venture capital is collapsing or stalled, or that later-stage growth equity is essentially dead. Headlines are highlighting the fact that deal values have plunged to their lowest in six quarters or that quarter-on-quarter or year-on-year growth is down significantly.