Data reveals VC market settling from pandemic boom. What will it mean for regional economies?

The third quarter of 2023 continues the venture capital market’s recent two-year decline in investments, investors, and initial public offerings. This puts a squeeze on startups. How helpful investment funding will be to startups in the rest of 2023 and beyond likely depends on whether the downward trends settle in alignment with pre-pandemic activity or continue into a VC-specific recession. Regardless, there could be dire consequences for many companies.

According to the 2023 Q3 PitchBook-NVCA Venture Monitor, the total observed investments in the U.S. through Sept. 30 were 9,962. Due to more recent deals being harder to observe (particularly true of smaller deals), PitchBook estimates that nearly 12,000 investments have taken place this year, putting the country on track for nearly 16,000 investments in 2023. This expected level of almost 16,000 deals is below the approximately 17,500 observed in 2022 and 19,000 in 2021 but still well above the roughly 13,600 deals in each of 2019 and 2020. 2023 is on pace to be only slightly below the 16,500 deals that a linear trendline of the past decade’s activity would suggest for 2023 (and exactly on pace if 2021 were removed as an outlier).

Elsewhere, PitchBook reports a recent decline in “nontraditional investors.” Among the entities PitchBook groups under this label, the most active is corporate venture capital. Corporate investors have declined from participating in a peak of 27% of all deals in 2021 to 24% now, the lowest since 2015 but still well above 2013’s 19%. Private equity and asset manager investors have been active in 12% and 7% of deals this year, respectively. These are well below 2021’s high of 17% and 11% but are back in line with those entities’ participation rates for most of the 2010s (and are, likely, tracking the bond markets’ yield curves).

Initial public offerings (IPOs) are the highest-profile means for an investor to exit from its investment in a startup, and their numbers have dwindled since 2021’s peak of 1,035. Just 181 companies in 2022 and 128 so far in 2023 have experienced IPOs, levels rarely seen in the past decade. PitchBook’s tracking of expected IPOs suggests that the market has swung from dramatically over-producing to under-producing these types of exits over the past three years.

Even if the market is settling back to long-term trends and not headed toward new lows, investment-backed companies could be in crisis. In 2021, a shock of private capital and government small business programs combined with a burst of entrepreneurial activity likely contributed to an abundance of new company formation and companies that might otherwise have petered out continuing to operate.

As marginal private investors lose interest in making early-stage investments and government programs run out of funding, a greater than normal share of new companies likely will find themselves unable to access additional capital and be forced to close. For economic development organizations, closures will mean lost jobs and investments in the short term. Hopefully, these regions will see their entrepreneurs translate this experience into new, more robust ventures in the future.

One trend in the Q3 2023 Venture Monitor that many regions will appreciate is that California’s share of investment activity continues to decline from 34% in 2021 to 32% in 2022 and a bit less than 30% so far in 2023. Perhaps some of the settling observed at the national level will not hit all regions as hard as the trends suggest.

Access the Q3 2023 PitchBook-NVCA Venture Monitor report and data file to see deal counts and value broken down by year, quarter, investment stage (e.g., pre-seed/seed), state, and sector.