Bubble Trouble? Venture Capital Distributions Are Down 90% In Q1, Industry Holding, Praying For Asset Price Rebound

Bubble Trouble? Venture Capital Distributions Are Down 90% In Q1, Industry Holding, Praying For Asset Price Rebound

venture capital distributions

Photo Max Zolotukhin / iStock, https://www.istockphoto.com/portfolio/MaxZolotukhin?mediatype=photography 

Interest rates, inflation and geopolitical uncertainty are helping to drive an 82.5 percent slowdown in venture capital exit activity in the first quarter of 2022 after a record-breaking 2021.

Venture capital distributions are down 90 percent in Q1 compared to Q4 2021, a stakeholder said.

However, investment activity remained strong in Q1 2022 with $70.7 billion in deal value — the fifth-highest total ever. But deal sizes and valuations have begun to slow.

“There’s been a massive decrease in venture fund stock distributions because all the stocks got hammered [and] venture funds just decide not to distribute when stocks are going [down],” said San Francisco-based Hans Swildens, founder of Industry Ventures. The firm makes direct investments, invests in venture funds, participates in smaller tech buyouts and is a limited partner in others’ buyout funds, according to a Techcrunch interview.

Some shares are now worth half of what they were in January, said Swildens, who claims to be in 450 venture funds.

“I see like a third of the whole market as an LP, and we used to get a check every day, every other day. Now, in this quarter, it’s like one every two weeks; it’s an 80% to 90% drop from an exit distribution perspective, in both cash and stock distributions,” Swildens told Techcrunch.

Venture funds are trying to decide whether to hold on or not, he added, “and in general, they’ve been holding. Not many venture funds have done distributions during the last three months. It’s been a huge drop.”

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Venture-backed exit value in the U.S. was $33.6 billion in the first quarter of 2022 — an 82.5 percent collapse from the previous quarter, according to PitchBook and the National Venture Capital Association (NVCA).

This followed three consecutive quarters of more than $192 billion in total exit value and was more in line with numbers in 2018 and 2019, Pitchbook reported.

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“The longer the IPO window stays closed, the more number of fresh unicorns and late-stage companies stack up, which can clamor into the public markets later on and put stress on the system,” said Kyle Stanford, a senior analyst at PitchBook. 

VC-backed companies that struggle to justify high valuations or show the revenues needed to IPO are unlikely to raise private capital in the short term, Stanford said. Such could be ripe for acquisition as an alternate route for their investors to get a return.

“The start of 2022 has shown signs of an expected adjustment for the VC industry on the heels of a two-year period where we constantly set new records and startups continually provided unique solutions to our global pandemic needs,” said NVCA President and CEO Bobby Franklin. “While the extent of this slowdown remains to be seen, VC investors are in a strong position with ample dry powder amassed in the recent fundraising quarters to fuel the entrepreneurs that amaze us by transforming how we live and work.”

Photo Max Zolotukhin / iStock, https://www.istockphoto.com/portfolio/MaxZolotukhin?mediatype=photography