PitchBook projects VC deal value to drop, deal count to stay high as market cools

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VC market shifts from founder-friendly “game of winning” to “game of picking.”

During a Collision 2022 presentation about the state of the VC market, PitchBook’s Kyle Stanford predicted that venture deal value will continue to fall amid the broader market downturn. The senior analyst of VC laid out some of the trends the American capital markets data and research firm sees playing out over the coming months.

“It’s not like you can just walk out the door and get tens of millions of dollars [anymore].”
– Vanta CEO Christina Cacioppo

Stanford added that there is “strong reason” to believe deal count will remain high in 2022, pointing to the amount of dry powder currently available in the ecosystem and the record number of non-traditional investors pumping capital into the market.

For San Francisco-based Vanta, raising capital in April 2022 was a lot different than it was a year ago. When Vanta closed its $50 million USD Sequoia Capital-led Series A round in April 2021, the main investor questions co-founder and CEO Christina Cacioppo faced were regarding how fast the automated cybersecurity and compliance startup was growing and hiring.

Fast forward a year later, and as the red-hot 2021 venture capital market has begun to cool down, investors were far more concerned with the Vanta’s burn multiple. “It’s not like you can just walk out the door and get tens of millions of dollars [anymore],” said Cacioppo, during a separate Collision panel about “recession-proofing” your startup.

RELATED: Canadian tech venture deal count continued to decline in Q1 2022, but total investment stayed high: CVCA

Notably, Stanford’s expectations contrast with what played out during Q1 2022 in Canada, as it was venture deal count that dropped while total investment remained high, according to CVCA.

Stanford said venture deal terms have typically been favourable to founders during past years amid strong competition on the VC side. While they have remained founder-friendly so far, he expects to see more investor-friendly terms going forward.

When asked whether the founder-friendly environment is now over, Villi Iltchev, partner at New York-based VC firm Two Sigma Ventures, said that during the past two to three years, VCs were more willing to concede on certain things to sign deals.

“It was a game of winning, not a game of picking,” he said, during a Collision panel discussing “hard truths” in today’s fundraising market. But according to Iltchev, today’s conditions have led to a return to the traditional approach: rolling up your sleeves and picking great companies. Going forward, he expects to see less competition for capital.

CRV general partner Matt Garratt said that these days, VCs have become more focused on their existing portfolio, which has led to startup funding rounds taking longer to close.

Vanta became a unicorn earlier this month after closing $100 million in Series B financing, amid what has become a much tougher fundraising environment for public and private companies alike, fuelled by rising inflation, interest rates, and geopolitical tensions. In these conditions, Silicon Valley kingmakers Y Combinator and Vanta investor Sequoia have advised startups to preserve cash, reach “default alive,” and strive toward profitability.

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According to Cacioppo, one of the “replicable” business decisions that helped Vanta during its early days was to exclusively charge customers annually and upfront for its software, which she said allowed the firm to operate at “cash flow break-even from the start.”

According to Stanford, the closure of the IPO window—which he expects to remain closed for at least the next two quarters—has also led to “a lot of pressure” at the top of the market for growth-stage companies unable to exit by going public.

Stanford anticipates that this pressure will continue to build and lead to a decline in growth-stage deal value, but as with the broader market, predicts that deal count will remain strong.

Josh Scott

Josh Scott

Josh Scott is a BetaKit reporter focused on telling and breaking Canadian tech and innovation stories. His coverage is more complete than his moustache.

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