Startups

Is the venture market slowing or did crossover funds just bounce?

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Image Credits: Nigel Sussman (opens in a new window)

As third-quarter venture capital data rolls in, the TechCrunch crew is busy parsing the numbers. We’ve looked at fintech results, we’ve touched on the crypto market, and we have a climate startup venture analysis coming this weekend. We’ve also looked at the U.S. venture market and its global analog. The main gist is that while VC investment in the United States is slowing, it appears that the global venture capital market is retarding more rapidly.

The macro picture is, however, an aggregated dataset. By that, we mean that when we consider all venture capital activity, it often includes some non-venture funds. Say, a hedge fund piling into startups in partnership with traditional VC deal-making. Last year, an influx of non-traditional capital helped push total venture capital numbers to new heights, raising startup valuations, and, at times, cutting into the due diligence process and generally shaking up the VC game.


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But now it appears that non-venture capital is ebbing away, leaving us with an interesting question: How much of the venture market slowdown is predicated on venture investors cutting check sizes and slowing their own deal-making cadence, and what fraction comes from non-venture investors simply bouncing?

Today we’re pulling from data concerning the United States to better understand that precise dynamic.

The bigger picture

The late-stage venture market is in decline, if we look at it from an aggregated perspective.

PitchBook data indicates that some $24.9 billion was invested into United States-based late-stage startup deals in Q3 2022. If you are curious how the dollar amount representing 1,249 late-stage deals is a disappointment, we hear you. But instead of measuring from zero up to $24.9 billion, we compare recent results with other data points, and in this case, the Q3 number was down by a staggering 48% from Q2 2022.

Even more, PitchBook writes that the Q3 late-stage investment total was an “11-quarter low.”

This is a bit weird. After all, we know that venture investors are flush and there are a host of hungry unicorns out there. What happened to the dollar value of late-stage deals? Some folks left.

PitchBook data indicates that the value of deals in Q3 that had participation from either a corporate venture capital group or a crossover investor collapsed from prior totals. The combined pairing of investor types took part in $20.8 billion worth of rounds in Q1 2021. That figure reached its zenith a few quarters later in Q3 2021, when the dollar value was $22.1 billion. More recently, 2022 has seen $16.8 billion, $12.3 billion and $7.2 billion in CVC/crossover-participated deals.

Given that corporate venture capital activity itself appears robust — per the same dataset — we can infer that crossover funds like Tiger are really out of the game.

TechCrunch+ wound up chatting through this concept before the data dropped with Kyle Stanford, who does analyst work for PitchBook. Here’s the key exchange:

TechCrunch+: Listening to you run through this, I’m forming an impression about last year’s venture market. It sounds almost like non-traditionals — crossover funds, etc. — rolled in, poured capital around like it was gravy, and distorted the hell out of everything, [getting] a lot of companies almost trapped now at a super [high valuation] without perhaps the fundamentals to back it up in a more conservative market. And then they left. And now we’re staring at a relatively healthy venture market — you know, angel/seed through Series B, Series C. But then after that, it’s almost like bunch of people wearing fancy watches that are broken, a facet of the crossover funds distorting things and then leaving?

Stanford: That’s probably something that’s going on right now. Right? I mean, [the non-traditionals] brought in [a lot of] money, and they’ve pumped up valuations and deal sizes, and these companies were expected to grow accordingly. [ … ]

So they’ve made these investments, and now they’re holding these probably overvalued securities that are unable to access the IPO market. And when you look at an acquisition, like Figma, you want to believe that that is a good sign but it seems like more of a one-off deal. And I don’t expect that many of the other companies should expect an Adobe to come in and kind of acquire them at a 50x ARR. Which sounds really ridiculous right now.

But I think we need to remember that the late-stage [startup market] it is really well capitalized. There’s been $300 billion invested in the late stage since the beginning of 2021. And so, there’s a lot of companies that still have a lot of cash. I’m not gonna [make] predictions on when the market’s going to turn around. But if [those well-capitalized companies] are able to make the cuts they need and lengthen their runway and have a decent underlying business with revenues that can help support them, then there should be a lot of companies that make it through to the other side. There are probably companies that will definitely take major down rounds, there are companies that will likely to go out of business from stages that in the past have seen very high success rates.

Stanford also pointed out that just the total value of mega-rounds — deals worth $100 million or more — added up to more last year than all the capital that was raised by venture investors during a then-record year. Put another way, the only way we got 2021 was thanks to a wave of capital from outside the venture game flooding in.

And if those non-traditionals are jumping ship, then perhaps a massive chunk of the declines we’re seeing more generally are not in the venture market per se, but more that folks who never really lived there packed up and headed for the highway now that summer is over.

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