A Blog by Jonathan Low


Jan 4, 2023

Why As VCs and Startups End Tough 2022, 2023 Isn't Looking Much Better

2022 was a brutal year for all investors, including those in venture capital. 

But 2023 is not looking great either. The perception is that the market has not yet bottomed, in part because insider rounds have kept startup valuations unreasonably high given the state of the markets and the economy. Many venture investors are holding back, both because they fear further declines, because the payouts to their investors are historically low and because they still have too much tied up in startups which may yet crater. As a result, this could be another tough year, at least for the first quarter. JL 

Heather Somerville reports in the Wall Street Journal:

Startups had a dismal year by every measurement in 2022, from plummeting investment to scarce public listings, and data point to a 2023 that could be more difficult. Venture-capital investment in U.S. startups in 2022 fell by a third from 2021. Startup funding declined sequentially each quarter. Once-hot tech sectors have fallen out of favor. The market for U.S. initial public offerings had its worst year since 1990. (And) the long-term partners who provide the funding for venture-capital are to receive less in payouts on their investments in 2022 than in any year (since) 2006. Startup valuations, down 43% from a year ago, remain higher than public tech-stock due to insider rounds.

Startups had a dismal year by nearly every measurement in 2022, from plummeting investment to scarce public listings, and data point to a 2023 that could be even more difficult.

As markets tanked in early 2022, many startup executives and investors were confident that a record amount of venture capital waiting to be spent—known as dry powder—and a lingering enthusiasm for new tech trends would buffer Silicon Valley.

No such luck. As 2022 closed, startup founders and investors were licking their wounds from plunging investment, scant opportunities to turn equity into cash, layoffs and business pivots. The startup industry is now staring down a bleak start to the new year, including signs that valuations have much further to fall, said venture capitalists, bankers and fund managers.


“You want to make sure the market’s hit a bottom before you invest, and people don’t think it’s hit bottom yet,” said Jesse Hurley, head of global fund banking for Silicon Valley Bank, which services startups and venture-capital firms. “Until there is that sort of leveling, people are just feeling a bit skittish.”

Venture-capital investment in U.S. startups in 2022 was on pace to fall by a third from 2021, according to research from PitchBook Data Inc., which provided data through Dec. 12. Startup funding declined sequentially each quarter during the year.

Once-hot tech sectors have fallen out of favor. The scooter business is limping along. Bird Global Inc., BRDS 12.65%increase; green up pointing triangle a one-time investor favorite valued at nearly $3 billion, is planning to merge with a Canadian company, and its stock is down more than 97% after it told investors it had overstated revenue for years, according to public filings. The cryptocurrency crash has wiped out many startups, punctuated by the implosion of FTX, whose founder faces fraud and conspiracy charges. Ford Motor Co.-backed self-driving company Argo AI and electric-vehicle company Electric Last Mile Solutions Inc.—both ELMSQ 0.00%increase; green up pointing triangle at one point valued at well over $1 billion—have closed in the past year.


A rout in public stocks, rising interest rates and broad macroeconomic uncertainty swiftly tempered the frenzy of 2020 and 2021, when a pandemic-driven shift online and historic bull market fueled record amounts of venture capital.

The market for U.S. initial public offerings—a way for startups to raise money and allow their investors to cash out—had its worst year since 1990, according to University of Florida finance professor Jay Ritter. About 139 special-purpose acquisition companies, or SPACs, liquidated in 2022, according to SPAC Research, undermining another tool used by startups and investors to cash in.

In the past year, U.S.-based venture-backed startups laid off more than 35,000 workers, according to Layoffs.fyi, a website that tracks job cuts in the technology industry. Some have scrapped business plans or shelved new products.

Getro Inc., which sells software to help startups with hiring, pivoted twice in 2022, said Chief Executive Evan Walden. First it tailored its product to service crypto-based companies, hoping to tap into the boom in so-called Web3 technology. Then in July, amid the crypto crash, the company reverted to its original business plan, Mr. Walden said.

After Mr. Walden failed to raise a $10 million funding round, he said he decided to focus on cutting spending, increasing revenue and getting his company cash-flow positive—without relying on investors. He outsourced work to contractors and automation tools, and kept travel and real-estate expenses to a minimum for his team of 21 employees.

He said the focus has paid off: The company was cash-flow positive in December and has enough money in the bank to last three years. “To be in a place where we would need to fundraise doesn’t seem like the best place to be,” said Mr. Walden. “There is so much uncertainty and fear and doubt in the market.”

Another risk for startups is that the long-term partners who provide the funding for venture-capital firms are on pace to receive less in payouts on their investments in 2022 than in any year going back to at least 2006, according to data from investment firm Hamilton Lane. This shortfall, combined with investment losses in public stocks and other assets, leaves them bereft of cash to plow into new venture-capital endeavors, said Miguel Luiña, Hamilton Lane’s managing director of fund investments.

Startup company valuations, while down 43% on average in the fourth quarter from a year ago, according to PitchBook, generally remain higher than their public tech-stock peers, investors said. Some startups raised so much money during the pandemic they have been able to avoid fundraising and are clinging to robust valuations leftover from a hot market. Others have drawn on alternative financing mechanisms that have allowed them to avoid the dreaded “down round”—accepting new funding at a lower valuation. This won’t last, investors said.

“There has been very little adjustment of prices” so far, said Mike Volpi, a venture capitalist with Index Ventures. Once startups run out of money, he said, “that is when valuations are going to correct.”

High valuations have endured in part because of so-called insider rounds, when startups raise money from existing investors with minimal, if any, valuation ding. Venture capitalists say they have seen a surge in such rounds—some estimate 10 times the number from prior years—which can help keep startups afloat. But such funding is often considered only a stopgap measure, deferring a startup’s potential valuation cut or ultimate demise.


Debt deals can also help startups avoid a down round, though they add costs. Startups raised more than $31 billion in venture debt in 2022, as of Dec. 12, according to PitchBook.

Roughly 2,750 startups in 2021 raised a seed round—generally the first round of institutional funding for a startup—and haven’t raised any venture capital since, according to an analysis of PitchBook data. Many of these startups, mostly young and unprofitable, risk running out of money in the coming year: Seed-stage funding rounds typically provide on average 18 months to two years of money.

“This is going to be a pressure to get money at all costs,” said Mark Peter Davis, managing partner at Interplay, a venture firm, family office and startup incubator.

Some have already succumbed to valuation cuts. Cybersecurity company Snyk Ltd. said in December it raised money at a $7.4 billion valuation, a 14% decline from the prior January. Artificial intelligence platform Dataiku Inc. said in December it had closed a deal at a $3.7 billion valuation, about a 21% drop from the prior year. The companies didn’t respond to requests for comment.

“I think we have a lot more pain to come,” Mr. Davis said.


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