Venture capital has been on a roller coaster this year. It came into 2022 riding the wave of the strongest year for venture deployment on record, just before the stock market plummeted and dragged venture down with it.
As the third quarter comes to a close, things have started to get really interesting — again. Venture deals are back! Adam Neumann is the head of a billion-dollar company! Figma sold itself for $20 billion in what multiple data sources believe is the largest venture-backed acquisition ever!
In a year that has proven time and again to be unpredictable, what will 2022 bring to its final episode?
The fourth quarter, especially before Thanksgiving, is traditionally one of the busiest seasons of the year — if not the busiest season of the year — for the industry to begin with. But this year will definitely feel different than years past. Deal pace has started to rapidly pick up after the slowest summer many VCs have faced in their career, and investors expect it to continue to gain momentum heading into the last quarter of the year.
For one, VCs need to make up for lost time after many chose to significantly slow down deployment — or sit out the summer entirely despite sitting on record levels of dry powder. They don’t want to show up to their yearly meetings with their LPs — who have been paying the same management fees regardless of activity — with nothing to show for it.
An investor told TechCrunch at a recent dinner that he predicts this fear alone will drag investors back into the market if they expect to keep good relationships with their LPs.
Deal counts also look poised to keep climbing because both the quantity and quality of companies out raising right now is high. Deena Shakir, a partner at Lux Capital, said that the caliber of deals heading to the market will increase activity.
There was general consensus, she said, that companies that went out to raise over the summer — knowing much of the market had slowed down — probably did so because they had to. The companies looking for cash now likely planned the timing of their raise and offer an attractive opportunity for venture investors to come back to market.
“There was a post-Labor Day boom,” Shakir said. “The reservoir [opened] and there was a flood. That is happening a lot and that is exciting. That’s our job. We want to see great talent coming to market.”
While there was an uptick in seed and Series A deals in September, that’s not been true at the later stages. While the later stages won’t likely recover this year, it seems probable that midstage deals will start to pick up again in the fourth quarter.
Why? Because many companies at those stages are currently out trying to raise but looking for valuations that investors aren’t going to agree to. Thus, they will need more time to settle on terms. But there are good companies caught in these conversations, which means investors are likely incentivized to figure out how to get these deals over the line.
Exit environment
There probably won’t be too much movement in the IPO market in Q4, Shakir predicted, which sounds right. Despite the fact that TripActions reportedly filed to IPO at a $12 billion valuation this week, it won’t likely cause a ripple effect. The public markets are still doing poorly, and it seems that many companies are looking for a signal of how a newly listed company will fare. TripActions won’t provide that until Q3 of next year.
If the exit environment starts to change in Q4, it will likely be due to M&A. Predictions earlier this year called for acquisitions to be on the rise in 2022 because IPOs were not as prevalent, and while that hasn’t happened yet, signs are starting to show M&A may pick up before the end of the year.
For one — hello, Figma. In a year likely to set very few records, Figma gets to claim it had the largest private software acquisition ever. It would have been huge in last year’s crazy market, but this year’s quieter environment, the impact is unprecedented.
As companies look at their balance sheets heading into the last quarter of the year, more M&A through consolidation seems likely. Startups acquiring other startups has also been on the rise, and there haven’t been any signs that will slow into Q4.
So how will the rest of the year fare? Few things are certain, but the one thing’s for sure: The fourth quarter will be anything but boring. An analyst recently told me that when we look back on this year it will make sense in hindsight. We’ll see if he’s right.
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