VC TRENDS | Global

Has Venture Capital turned the corner?

This 3-part blog series explores the question: Has venture Capital turned the corner after its downturn in 2023? In Part 1, we look at global markets with a subsequent focus on Africa and South Africa, specifically in Part 2. In Part 3, we explore the Latin American market in more depth.

Regardless of the data one looks at, Venture Capital (VC) and technology investments have been challenging since early 2022, when war in Ukraine impacted global economies, interest rates and investors’ risk appetite. It started with a fall in the Nasdaq Composite Index (often used as the global proxy for tech stocks), which peaked in November 2021 and thereafter began to decline and had lost as much as a third of its value by June 2022. New AngelList data suggests a 9-18 month lag between public market performance and VC markets (previously 9-12 months). While Crunchbase data shows that funding into global startups declined 12% q-on-q in Q1 22, valuations are stickier and only started declining in Q3 2022, around 9-12 months after the decline in the Nasdaq. Valuations on the downside take longer to materialise than funding into startups but will likely recover at a similar time to funding since VC’s are incentivised to see values increase. As per the chart below, startup funding has steadily declined since Q1 2022, with a slight recovery in Q3 2023, but still down 15% year-on-year.       

New data suggests a

9-18 month lag between

public market performance

and VC markets.

Startups have taken strain

The negative impact on startups from the funding fallout has been substantial. As funding dried up in 2022, startup shutdowns increased sharply and continued upward in 2023 at a staggering rate, with 212 shutdowns in Q3 2023 being the highest since Carta started tracking this data. The cadence of startup fund-raising is useful in understanding this. Crunchbase data suggests that the average timing between startup funding rounds is 27 months. If a startup raised funding at the peak in Q4 2021, then this funding will likely only expire around nine months. However, many startups were not so lucky with their timing and have been subject to the vagaries of the current market. 

Negative impact on valuations

The pressure from funding and startups closing had led to lower year-on-year valuations across all deal maturity levels in Q2 2023. However, the most recent data for Q3 2023 has seen this trend reverse, as shown in the table below. Notably, the later stages (Series C and D+), where the biggest declines happened earlier in 2023, have seen some recovery. The natural exit for these startups is often an initial public offering (IPO). Many IPOs have dried up since early 2022, but the tentative return in Q3 2023 via Arm, Instacart and Klaviyo might have driven price recovery in these later stages. Encouragingly, all quarterly price changes across the stages have been better than the annual price changes, and there is positive q-on-q growth across all maturity stages. 

What this means for the future

These glimmers of hope lead to the important question: when does the natural economic cycle in VC inevitably swing upwards again? While VC funding is down massively from the 2020-21 boom, it is currently at levels roughly similar to 2019 (pre-pandemic) regarding the number and value of deals. But very few would argue against the thesis that the pandemic accelerated the need and use cases for technology companies across a wide spectrum of sub-sectors. Surely, there will be a greater need to finance these companies than before the pandemic, which merely created a temporary market distortion in funding and valuations. 

The pandemic accelerated

the need and use cases for

technology companies.

Looks like we are near the bottom

The public markets are certainly responding as such. The Nasdaq Composite Index has shown a strong recovery in 2023, up 37% year-to-date to 30 November (a recovery which started in November 2022). Non-tech markets have also responded well this year, with the S&P500 Index up 19% and the MSCI All-Country World Equity Index up 14% over the same period. Given a 9-18 month lag between public and VC markets, the mid-range (13.5 months) would be now, and the upper end of that range around May 2024. From a valuation perspective, the lag looks about right for the VC market to start showing meaningful recovery between Q1 and Q2 2024. We also expect funding and valuations to recover to levels higher than in 2019 but not quickly reaching the record-breaking levels of what looked like an unnatural asset bubble in the ensuing years. Buckle up, the data indicates that the worst is close to over. 

In Part 2, we explore the impact on Africa and South Africa.

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