Venture Capital Firms Sitting on a Record Amount of Money
2022 investment numbers are down, but reserves are at figures not seen before
Recently released reports show that through the third quarter of 2022 approximately $290 billion is at the reach and behest of venture capital firms while the volume of investment has decreased about 10% from the record number of the prior year. Around $140 billion of the aforementioned amount raised was put together during the first half of the current year and represents an almost equal figure for that accumulated during the entirety of 2021. These totals do not include funding that may be derived by companies from other sources such as non-traditional investors who contributed value well north of $250 billion across more than 6000 deals thus this record haul currently placed in effective storage is exceptional on a number of levels.
What does this mean for the near future?
During 2021 the value of exits by companies backed by VC’s reached almost $800 billion. Approximately 65% of that amount came from ventures operating in the software (almost 47% of the total) and biotech/pharma realms. The comparative amount seen so far in 2022 shows a marked decline in dollar totals and number of organizations seeking to go the IPO or merger/acquisition route given the unclear paths available in the current environment. SPAC’s have also seen a pronounced decline that appears to follow this trend in a fairly concurrent fashion.
Limited partners have also encountered a rather unique environment where VCs are bombarding them with unforeseen and historic returns to the well that many simply cannot meet due to in place regulations or additional restrictions. Indeed, the typical time spent between VC fundraising motions has decreased from almost every three years to just over a year and a half based on recent data. This has resulted in a construct whereby a host of the largest firms have been able to fully secure their latest aggregate asks while many of the remaining players on the board are receiving less than expected amounts or simply being dropped altogether by LPs.
Those who contribute sums of capital eventually want it placed into play with the general expectation that returns will match or surpass percentage growth typically seen over the years. A number of discussions we’ve had make it fairly clear that there are individuals who believe the current endowment is more than sufficient to carry through most downturns and that we should expect a fair amount of activity during the initial onset of 2023. Conversely, there certainly is a group who feels that the cash accumulation is simply a tagalong from the prior year’s unmatched activities that hasn’t been properly represented on paper as of yet and does not adequately reflect the market as it actually stands.
The key factor to consider is how investors will approach the new conditions where the balance has shifted in their favor once more and they have the ability to employ greater time, diligence, and bargaining power to generate more attractive deals from their perspective. This may very well lead to a significant increase in activity post Q4 2022 (a quarter that more than likely will see continued decline in allocations due to short term uncertainty) as confidence is regained and a clearer picture of how the overall market will respond is delineated.
