The Q3 2022 decline in venture capital means big changes for entrepreneurs and investors

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As online commerce continues to mature, brands are adopting a more defensive posture. This change has been not just in response to market volatility but also due to the rise of new competition.

Venture-capital backed companies raised $37 billion in the third quarter of 2022, down 37% from the second quarter.

In spite of a recent economic slowdown, there is still significant funds available for investment. Venture Capitalists have already raised $151 billion in funds this year. This makes for a record-setting year for investments.

As the saying goes, “to fail to plan is to plan to fail.” Business owners should focus on execution, customer retention and unit economics if they want to weather any looming economic storm.

Venture capital investment continued to decline in Q3 of Year 2022, with VCs investing 37% less. Even with this significant drop-off, the year has already been one of the highest on record. We also expect total VC funding to hit $200 billion and be the fifth consecutive year over $100 billion.

The narrative for the industry is changing rapidly. Companies are going on the offensive, whereas entrepreneurs and investors are adapting to a new environment. Market volatility will persist due to inflationary pressures and recession fears. Meanwhile, it’s also important to remember that we’ve been through rough patches before.

There’s a lot of money on the sidelines in Silicon Valley, and more than ever before. Entrepreneurs with compelling business models will continue to raise money, as VC fundraising reached $151 billion for this year alone. This marks the fifth consecutive record year in a row.

Investors are finally starting to deploy capital after a tough year and a half of FOMO (fear of missing out.) Now, we’re seeing investors take their time before investing. This might be tough for the entrepreneurs who need immediate funds, but it’s good news for those taking their time, investing in customer growth and retention while having a clear path to profitability.

Large-scale financing.

Megadollar count was down significantly this quarter, continuing a nine-month slide. All deal classes were down. Late-stage deals are down more than 50% because of the lack of mega-rounds because they’ve driven the growth in recent years. That’s been really important and has contributed to reversing the trends we’ve seen recently.

Health care had the largest number of mega-deals in Q3, with energy coming in second place. The IT and business and financial services sectors were way behind with only 56% and 53% respectively. These sectors have been heavily impacted by the shifting economy.

Energy and utilities have raised more than they did for the entire year in just the last nine months. This sector is riding a wave of interest in new technology that appears to be able to mitigate the climate crisis, combat rising prices on oil and gas, among other commodities, and produce sustainable nuclear and clean energy. Two of the five top deals this year were in this sector, led by a $1 billion investment in an electric vehicle charging infrastructure company. Other notable investments include sustainable nuclear technology and materials.

The IT sector, which has been its strongest performers over the last few years, showed a 54% drop in revenue. The software industry had its first sub-$10 billion quarter since Q4 2020, which is significant given just how well they’ve done this year.

Rather than posting the aforementioned results, business and financial services are actually declining. Compared to the first quarter of the previous year, this industry has seen a 44% decrease in contracts recently. Meanwhile, healthcare is similarly experiencing a drop, with 19% fewer contracts closing during the most recent quarter.

Regions

The top four regions in the US are San Francisco, New York, Boston, and Los Angeles. 63% of investment came from those cities in Q3.

Miami appears to be on the rise in terms of activity, having entered the top 10 this year by number of deals (8th) and value of investment (6th). This may be significant as one of a few new entrants to the top 10 this year.

It may be too early to draw any conclusions, but through expanding technology and talented people, more hotbeds will grow quickly.

Entrepreneurs will benefit from our research-backed data and analytics, as well as resume critiques to not just help them find the next job, but also make sure they’re getting the best opportunity.

As an entrepreneur, it’s your responsibility to focus on execution and delivering what you promise to your customers. It’s important for you to be able to demonstrate that you’re taking advantage of the resources at your disposal, like product-market fit, branding and social media advertising. The future looks promising when you can show how many customers have been acquired through current efforts.

When it comes to customers, you want to make sure they are happy and feel appreciated. Ecommerce companies should focus on retaining these important people and reduce churn as much as possible. It can also be beneficial to negotiate with customers when a product has high utility. For example, you could ask them for up-front payments in exchange for a discount or good deal.

Always challenge your product roadmap, in terms of timing and monetization. Can you expect more from your current customers based on the investments you have made in your roadmap?

It’s important to have a support network in place as you head into your professional life. Your family and nearby friends might not be the best choices, but having an alumni network in a close-by location could be perfect. An alumni network can provide camaraderie, job opportunities, networking connections, leadership training and mentorship.

Final Thoughts

Although many investors and entrepreneurs have experienced downturns in the past, most new entrants have yet to experience that same level of downturn. This will prove challenging for those trying to make their way up the success ladder.

October is usually a good proxy for the new normal of late year, which will be supported through the completion of deals that have been in the pipeline over summer. A soft start to the quarter can be expected, but we still predict full-year VC activity will finish above $200 billion.

Companies that offer real utility will gain more interest from investors, specifically those in the energy sector, health care and information technology.

We are seeing renewed interest in Clean Tech 2.0, with companies addressing climate change and developing new energy sources. Investors are now more willing to focus on these initiatives as changes that take account of climate change have grown accepted across the business world.

One of the hamstrings to growth is the fact that many potential investors are waiting for the market to bounce back before they start giving funds again. The good news is that investors always come back when the market bounces, and this time will be no different.

Source: Crunchbase as of October 3, 2022

Disclaimer:

The viewpoints in this article do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization. The numbers included are from EY analysis and are based off of Crunchbase data unless indicated otherwise.

We include equity investments into VC-backed companies headquartered in the US. This includes funding from VC firms, corporate investors and other private equity firms, as well as individuals.

Summary of article.

Investors were less active in Q3 of 10, with investment totals declining for the fifth consecutive quarter. Total VC funding is anticipated to top $200 billion, yet a consistent volatility in the market means entrepreneurs will need to continue cautiously acquiring and retaining customers who demonstrate profitable paths.

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