For the first time in years, it felt like venture capitalists slowed their cadence this summer. In days of yore, such “summer slowdowns” were par for the course, as investors took long holidays in August, leading to a general paucity of VC activity.
Then the market went nuts for a few years, and such breaks became rarer as investors, by our read, wanted to stay close to their workstations to avoid missing out on a hot deal that might close in hours or days, instead of the traditional weeks and months. The decline in activity that many of us felt has been reflected in Q3 data that TechCrunch has analyzed to date.
What about a Q4 comeback?
But the slowdown was tied in the eyes of many to a possible rebound. Our own Rebecca Szkutak wrote in September that some folks were anticipating a Q4 resurgence of venture capital activity. The bounce back was partially expected due to a “wait and see but come back later” vibe among venture players we’ve spoken to in recent months.
But even more, it’s been argued that venture investors sitting on funds that they held in reserve would want to do some deals in the fourth quarter to avoid going to their backers (LPs) and saying, thanks for the management fees; we did nothing with your capital.
Will Q4 turn into a rebound of sorts from Q3’s slower-than-before venture capital activity? PitchBook analyst Kyle Stanford is somewhat bullish on the matter, but takes an entirely different perspective on the LP question.
In a recent interview with TechCrunch, Stanford echoed the perspective that many venture investors took “their summer break this year,” adding that it was perhaps “the first time in probably three years” that they did so. He doesn’t view the choice as suspect, calling it a “good time” for such a pause because “the markets were going crazy,” making it a reasonable opportunity for a “kind of reset.”
Resets end, however, meaning that Q4 could bring a snap-back in deal-making — right? Maybe. Stanford told TechCrunch that many “investors have their strategy for the year down,” and that simply having gone slower for the first three quarters of 2022 — if they did choose to decelerate their investing velocity — doesn’t mean that they are going to suddenly get busier.
“There’s nothing that really points to them upping their deal count just to be able to show their LPs” that they are busy, he said.
Why is that the case? In Stanford’s view, venture investors can go to their LPs and say, “Hey, listen, we saw this disconnect in the market,” making the measured choice to “not invest so we haven’t called down your capital.” From the analyst’s view, LPs will be content with that investor choice because there is “still a lot of uncertainty” in the market, from interest rates possibly continuing to rise to inflation persisting longer than feared.
“I think everyone is still happy to take a breather and let all the dust settle,” he added.
Bad news all around, then, if venture investors aren’t going to feel as much impetus to get busy in Q4 as we might have expected? Not precisely. Stanford said he expects that seed and Series A deals, the earlier tranches of the venture game, “will continue moving along,” though he added that he doesn’t expect to see even those rounds jump back to where they were in 2021 in terms of frequency.
Stanford’s view tracks somewhat neatly with what Q3 data has shown us thus far — that in the United States, venture capital activity is down from prior periods, but not so much slower that it makes 2020 appear winsome; it’s only when we compare this year to what we saw in 2021 that the investment numbers appear weak. Is a reversion to the mean, akin to what we have seen in fintech, really so bad? Perhaps not.
For later-stage startups, though, it’s a more difficult market. Stanford said during our chat that he’s “seen the late-stage valuation in particular take up pretty dramatic dive,” which could imply that the gap between how startups value themselves and the prices that potential backers are willing to pay remains far apart.
If that’s the case, Q4 late-stage deal-making could remain depressed even if venture investors have extra reason to get deals done.