Venture capital funds in the United States raised more dry powder in the first three quarters of this year than they did in all of 2021, but it’s not equally distributed: The big funds keep getting bigger while fundraising has gotten harder for the majority of other players. And Q3 data shows that where a firm is based appears to be playing an increasing role.
Through the third quarter of 2022, U.S. venture firms raised $150.9 billion across 593 funds, according to data compiled by PitchBook. While this represents a boost from the $147.2 billion raised in 2021, it marks a staggering drop from the 1,139 funds closed last year.
A lot of these dollars went into legacy or well-established firms, which have the clout to raise mega-funds, though some firms drew in dollars by garnering hype. Consequently, LPs are not as interested in backing firms outside of the established venture hubs this year, marking an unfortunate reversal to the COVID-induced trend of more venture money making its way to emerging ecosystems.
In July, using Q2 data, I wrote about how it seemed LPs were abandoning the Midwest specifically. At the time, I noted this didn’t make sense because many of those firms back local companies, which would likely experience a softer landing as valuations came back down to earth because those ecosystems traditionally began with lower valuations than those on the coasts. Multiple inventors in the region agreed.
But now, armed with an additional quarter of data, it seems that it isn’t a Midwest problem; most funds outside of the two largest startup hubs — San Francisco and New York — are feeling the frost from potential LPs.
So far this year, 77% of capital has been raised in just California and New York. In 2021, those states raised 68% of the year’s totals.
Through Q3, California and New York were two of only 12 states (including Washington, D.C.) that have seen higher fundraising this year than last — and really the only two in that category putting up meaningful numbers. In addition, they are two of only five states that have already set new yearly fundraising records in 2022.
The other three are Tennessee, Georgia and Florida, which shows that the Southeast seems to be an outlier in some of these decreasing trends this year, which TechCrunch has dived into before.
This compares to 2021, when 20 states set new records for local fundraising. The signs of this reconcentration to the coasts are already showing.
In July, Chicago-based MATH Venture Partners announced it wouldn’t be completing its raise for its third fund because it couldn’t secure the LP backing. According to what was posted on Twitter, many VCs seem shocked to hear that.
Earlier this week, I published a story on SpringTime Ventures, a Colorado-based fund that was able to secure $25 million for its second fund. While they were able to close the fund on target, the fundraise highlighted the sheer pullback Midwest funds are facing. The fund held its first close of $22 million in November of last year, and it took about the same about of time to close the remaining $3 million — which just closed last week, a year later — due to market conditions.
“Almost all the folks I was speaking to said they were too overexposed on early-stage tech,” SpringTime managing partner Rich Maloy told TechCrunch, citing the denominator effect, which gets triggered when certain assets drastically change in value, making others appear overweight. “These are folks that are individuals with successes under their belts and previous exits.”
Managing partner Matt Blomstedt added that a question that kept coming up once the market conditions changed was this: How much of their fund had they deployed since their first close? LPs were clearly making decisions based on how much a still-raising fund had deployed into 2021’s lofty valuations. I wonder if other firms are running into the same trouble.
Memphis, Tennessee-based Ridgeline also told me a month back that their fundraising process was a slog, made harder by multiple LPs dropping out as they headed into this year’s new market.
I wanted to get a better look at how the fundraising process had gone for other firms located outside the hubs this year and realized it was hard to find potential sources.
Going through the Q3 data, I observed that there were very few funds of meaningful size — over $10 million — closed outside the established hubs after Q1. Of the ones I found, almost all were sector-specific in areas requiring domain expertise like biotech and defense.
This doesn’t bode well for generalists or emerging fund managers located outside the top two venture markets. Hopefully, the narrative changes once the knife really starts to fall on valuations, because otherwise, this retreat could have a damaging ripple effect on these emerging tech hubs and entrepreneurs who were just starting to build momentum.