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It is always nice to start a new year with a dose of optimism — as long as it is warranted. After reviewing PitchBook’s latest analysis, I am starting to reconsider my expectations for seed-stage dealmaking in 2023, and maybe you will, too. Let’s explore. — Anna
Upcoming pressure?
As 2022 came to a close, I tried to keep my expectations in check: If even Instacart was no longer ready to go public just yet, I had to gear up for the dearth of tech IPOs to continue in the first quarter or even the first half of 2023.
However, seed-stage venture capital activity was one of the things I felt reasonably optimistic about for the new year. Sure, public market woes had trickled down to private dealmaking. But while post-Series A deal count and deal volume were impacted, angel and seed-stage investment activity seemed pretty stable.
Well, it seems I was both right and wrong. According to the Q4 2022 PitchBook-NVCA Venture Monitor First Look report, “angel- and seed-stage deal activity remained relatively resilient in 2022, with $21.0 billion invested across an estimated 7,261 deals.” That’s for the bit I was right about: 2022.
It’s for 2023 that things might not bode so well.
“Should the economic downturn continue, we expect this [angel and seed] stage to start to feel pressure due to declining deal activity and investor demand in the early and late stages,” PitchBook warned.
Whether the downturn will continue is beyond PitchBook’s scope and mine, but based on what I am reading, it is a fairly strong possibility.
PitchBook isn’t making its prediction out of thin air. One of the data points the firm highlighted was “four consecutive quarters of declining deal counts,” which “could foreshadow a continued slide in 2023.”
Another factor is that some tailwinds could cease as high interest rates and inflation reshuffle the deck.
A less appealing asset class?
The participation of nontraditional investors was one of the factors that helped seed-stage deal size and valuations grow in 2022, PitchBook said. For both angel and seed rounds, the U.S. median pre-money valuation was higher last year than in 2021, its data indicates.
But the macro factors being what they are, there are reasons to think that nontraditional investors will be less present in tech in 2023. “Relative to 2021, the upside potential for the VC asset class declined significantly in 2022, which turned many investors away from the space,” PitchBook wrote.
Fewer investors could lead to a decline in valuations, but that’s not necessarily worrying, especially after a period of hype. However, a potential deal count decline is more of a concern for founders. Or for anyone who likes seeing super-early startups get the funding they need to become a real thing.
Max Navas, VC analyst at PitchBook, suggested that being super-early is one of the reasons why seed-stage startups are more resilient. However, he also told TechCrunch that it is not just nontraditional investors who might go AWOL in 2023:
Angel and seed-stage startups are more insulated from macro volatility than their early- and late-stage counterparts due to their nascency and ability to pivot and adapt more easily. The strong fundraising environment from prior years and the movement of larger VC firms into earlier investments helped buoy deal metrics in 2022. That being said, we remain wary of the potential for investors to reduce or temporarily stall investments at this stage as the ability for their portfolio companies to raise further fundraising has become more difficult.
Of course, PitchBook is only issuing a warning, and we can still keep our fingers crossed that the prediction will not come true. But if you don’t want to be disappointed, you may not want to put high hopes on seed activity.