Today is the final day of Q3 2022, which means we’re heading rapidly toward the end of the year. And because today is the final day of a financial reporting period, it’s a great time to join TechCrunch+!
Jokes aside, we had a long list of expectations here at The Exchange, but, sadly, much of that did not come to pass. Perhaps after the last few years of go-go venture capital and startup activity, we were a bit overeager. We weren’t the only ones, of course, judging by how many founders reined in their fundraising horses until market conditions improved, which largely didn’t happen in the third quarter.
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To celebrate our errors, we’re going back through a list of things that we didn’t see in Q3 and putting some of our expectations for Q4 on the record.
Given our usual focus, we’re talking IPOs and valuations to a degree. We’ll also cast our vision beyond the U.S. and see what markets elsewhere may come up with in the final quarter of 2022. After all, there’s quite a lot going on in Europe, Latin America and other startup-heavy regions of the world.
Goodbye, Q3 — you weird continuation of Q2 fears made real.
What Q3 did not bring
The largest letdown of the third quarter — apart from various global tragedies and crises — was the absolute dearth of IPOs. We didn’t even get an S-1 filing for the fourth quarter to whet our appetites. Heck, SPACs were quiet as well, and this particular deal was the only material blank-check transaction from the quarter that we can recall.
This means that our list of Very Possible Near-Term S-1 filers is short and unchanged. Instacart didn’t file, just as Reddit failed to drop an IPO prospectus. TripActions has joined the group, but given its expected timeline stretches to 2023, it’s past our current vision.
Our hopes for an intrepid unicorn or decacorn braving conventional wisdom to push ahead with an IPO were rudely dashed in Q3. We remain in a holding pattern for non-M&A late-stage startup liquidity.
We didn’t get any IPO filings this quarter because the battered fintech and software sectors mostly failed to recover even modestly, which we’d also hoped for. Indeed, fintech-focused ETFs are right around where they started the quarter, and our favorite cloud index is much the same. There was a brief period in the middle of Q3 when valuations in both well-trod venture categories seemed like they’d make a comeback, but those hopes were also dashed as Q3 came to a close.
The continued valuation crunch also meant that venture deal-making was a little bit blah in the third quarter. While there is some evidence that early-stage investments are picking up, late-stage deal-making remained muted. But why weren’t venture investors cutting checks left and right even with valuations hitting the floor? Well, it’s likely because founders were hoping that public markets would rise, lowering pressure to take on capital at a discount. But that didn’t happen, which means that founders and venture backers are still at pricing loggerheads.
However, there’s reason to believe that Q4 venture capital activity will be hot regardless of what happens to valuations. Let us explain.
What Q4 should bring
We have a good reason to expect investment activity to pick up in Q4: Venture capitalists are sitting on staggering amounts of dry powder.
As The Exchange noted in July, per PitchBook data, “venture capital raised but not disbursed — what it calls ‘U.S. VC capital overhang’ — reached $198 billion in 2020, $234 billion in 2021 and $290 billion at the end of the second quarter of 2022.”
Venture capitalists are supposed to deploy this capital. If they don’t, they could end up angering their limited partners — those who gave them money to invest in the first place. This creates a strong incentive for VC funds to have some activity they can show to their LPs by the end of the year. (More on that on TechCrunch+ this weekend!)
On the entrepreneur side of the coin, incentives look quite different. Survival is top-of-mind here. If founders don’t want to see their startups die, anyone who chose to wait but still needs to raise will have no choice but to accept lower valuations and worse terms than they were prepared to.
Hence our prediction: Activity might pick up in Q4, but we don’t expect valuations to nearly approach 2021 levels.
Later-stage companies, too, will find themselves realizing that delayed exits are a dangerous game. This should bring us some S-1 filings from scaleups willing to bet on going public in the near future, even if it means having a lower market capitalization compared to a year ago.
That’s it for the good news if you’re IPO nerds like us. As for the bad news, we wouldn’t be surprised to see a new wave of layoffs in startup land. In a survey of some 500 leaders of tech companies in Latin America, VC firm Atlantico found that most companies had only modestly decreased headcount — at a time that seems to call for more caution around fundraising in the near term.
Declining VC investment into LatAm startups could throttle digital growth
There are plenty of reasons to remain optimistic about Latin America in the long run, though, and local funds remain fairly active, so we don’t expect activity to come to a stop in Q4 (except for tech IPOs). Some regions, such as Africa, have even more catching up to do, and should remain relatively untouched by the slowdown.
Europe, however, is sending mixed signals. The U.K.’s macro conditions don’t seem auspicious for IPOs, and we suspect that quite a few continental unicorns have lost their mythical horns over the last few months. But as always, we don’t mind being wrong, and we’ll be tracking this closely to see if our predictions come true.
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