Much has been said about the venture slowdown in 2022. Though every asset class has cooled, recent data shows that VC activity is beginning to rebound. Another silver lining has been the abundance of opportunities for investors with a long-term horizon.
KPMG’s data shows angel and seed investment increased as a percentage of total deals in late 2022. This is partly due to the influx of new, first-time venture funds.
VCs are still winning
The dreaded “down-round” has yet to make a non-trivial dent in the venture ecosystem. The percentage of down-rounds has been more than cut in half in recent years to the single-digits. When an anomalous down-round does occur, it often makes headlines and is seen as a sign of trouble in the startup market. But down-rounds are a natural part of the business cycle and don’t necessarily mean a company is in trouble.
For example, a 2019 Forbes article points out that Berkshire Hathaway invested at a significant discount in Paytm at a $10 billion valuation. Today Paytm is worth over $400 billion. Not bad for a company that was “in trouble.” In 2016, Flipkart raised $1 billion in a down-round following a $15 billion valuation. Today, the firm is worth around $70 billion.
Simply put, down rounds are far from a deal-breaker—they’re just a fact of life in the venture world. And in many cases, they present an opportunity for investors to buy into a company at a discount. What’s more, valuations are still strong, despite the slowdown.
As the KPMG report puts it, as of Q3 2022, “valuations have yet to slide meaningfully.” Not only that, but 2022 set a new high for capital commitment. Underlining the value of geographic diversification, some regions are seeing particularly strong growth. In India, for example, fundraising is already more than double the previous record annual high at the end of Q3.
The show goes on
In the face of all this, it’s easy to forget that venture is still a young industry. In Q2 1999, VC funding hit a record $7.7 billion. Last year, it hit $445 billion, with $77 billion in Q4. Even the recent nine-quarter low is an order of magnitude above that peak in the late ’90s. Similarly, the devastating Great Recession saw a massive deficit in funding, but by 2011, funding had returned to 2007 levels.
Returns, too, are robust. Looking at performance for 2008–18 vintages, the median private equity fund returned a net IRR of 19.5% through Sept 30, 2021. Amidst the current public market turmoil, private equity managers “are sleeping well”: A long-term, disciplined approach to investing and the ability to capture attractive, off-market deals is paying off.
Of course, there will be periods of ups and downs—that’s just the nature of investing. But for those with a long-term horizon, the current market conditions present an opportunity to get into the venture game at a discount.
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