Los Angeles is slowly recovering from a prior quarter drop but is still far off from the record-breaking year it saw in 2021, while the rest of the United States is in a slowdown for venture capital investing.
Nationwide, analysts from PitchBook Data Inc. and the National Venture Capital Association found that investors remained wary, participating in fewer ventures and writing smaller checks. According to the most recent data from PitchBook’s Venture Monitor, covering the months of July through September, total investment in the United States hit a nine-quarter low of $43 billion, with transaction counts falling across all sectors by 20% from the first quarter of this year.
Even sales-focused businesses are seeing fewer employees leave in recent months. PitchBook described 2022’s exit activity as “lethargic,” noting that the total value of corporate sales is expected to drop below $100 billion for the first time since 2016 this year. PitchBook revealed that roughly half of the exit revenue collected so far this year in the United States came from acquisitions.
So far this year, there have only been 59 public listings, whereas, in 2017, a record-breaking 303 venture capital-backed companies went public. According to PitchBook data on traditional IPOs, only five firms went public in the third quarter.
However, investors and company creators in Los Angeles may soon see a glimmer of hope. There were 321 agreements closed during the third quarter, with a total value of $7.1 billion. That’s an increase of about 39% from the previous quarter when VCs invested a total of $4.8 billion across 278 deals in Los Angeles-based firms.
West Hollywood’s Type One Ventures co-founder Tarek Waked believes “a lot of funding is on the sidelines.” People’s spending habits have changed and the economy is slowing. When it comes to their investments, limited partners are becoming more cautious.
However, PitchBook reports that some of the highest-valued deals in the past quarter were in Los Angeles. The average amount of a deal in this region was roughly $15 million, putting it somewhat behind the Bay Area but ahead of other major cities such as New York and Boston.
Unfortunately, not everyone is riding the wave. This has been a challenging year for Los Angeles’ female entrepreneurs. Since 2019, PitchBook has been keeping tabs on the number of finance companies with all-female founding teams raised. So far, they’ve only raised a total of $1.9 billion, putting them far behind the New York and Bay Area, where female founders have raised $4.9 billion and $5.5 billion, respectively.
A recent analysis by PitchBook indicated that “during the economic crisis, funding is being distributed less to startups created by women.”
It’s official, as PitchBook CEO John Gabbert put it in a statement released on Thursday, “The VC slowdown narrative that has been ubiquitous in the industry this year has manifested in the statistics,” with practically every measure decreasing dramatically in Q3 aside from financing. “The VC ecosystem has demonstrated extraordinary resilience in the face of continuing economic headwinds, raising record levels of capital and closing an unusually high number of deals,”
After 2021’s all-time highs, this supposedly negative trend may just be a correction or a return to the norm.
According to Gabbert, “2021 was an anomaly year,” and the VC market is now back to pre-pandemic levels and long-term trends of steady growth.
Anna Barber, a partner at VC M13 in Santa Monica, agreed that 2016’s unprecedented activity was unprecedented.
I think the ’21 venture market was an exception, and we’ll see venture activity return to a measured pace given all the money waiting on the sidelines right now,” Barber told dot.LA. She went on to say that M13 anticipates a rough ride for residential property tech companies in particular due to rising interest rates that could cause a slump in home sales, but that the financial services, identity management, eCommerce, and Web3 consumer technology and developer tools and platforms industries are among those that M13 is eyeing as potential growth sectors.
“In the previous few months, many VCs, including ourselves, have been concentrating on our own portfolios, making sure that the firms we’ve invested in have the resources they need to succeed. A sudden influx of venture capital financing is not to be expected, though.” Those are some warning words from the barber.
“More likely, deployment schedules will be pushed back. This means that when conditions are difficult, VCs will take a little more time to invest the money they already have rather than returning to the market to raise more. “
Despite the fact that venture capitalists aren’t handing out checks at the same rate as they once did, they’re nonetheless raising money at a breakneck pace. National venture capital fundraising has already surpassed its all-time high for this year, with PitchBook estimating that VC firms will raise about $151 billion in total in 2022, up from $147 billion in 2021.
Minnie Ingersoll, a partner at Los Angeles-based TenOneTen Ventures, stated, “I think that there is a lot of VC money that has been raised and has to be spent.” “Personally, I think this should be a terrific time to be deploying capital as values fall down and we get back to ‘normal’ multiples.”
Since the markets have been so volatile over the past year, Waked claims that some investors are trying to ride it out. However, “after that uncertainty is quelled, I think you’re going to see an uptick,” he said, so don’t worry too much just yet.
While the VC industry as a whole may be experiencing a hiccup, Waked has reported no slowdown in investment in the sectors in which he specializes, such as space and deep technology.
I’m not oblivious to global events or market fluctuations, he said. As a venture capitalist, however, I believe you must ultimately be an optimist. The upside is what you’re betting on, not the risk.
According to Ingersoll, the downturn appears to be affecting late-stage businesses the most.
According to Ingersoll’s interview with dot.LA, “We have not witnessed a slowdown in our pipeline or in the rate of deployment,” but he has noticed and heard about it from later-stage companies. Most of the truly great growth businesses will have raised capital in 2021, and it will be easier to identify the breakout companies at this stage. Furthermore, if a company has sufficient time until it needs additional funding, it is unlikely to want to go public today. “
Ingersoll speculated that the IT industry would experience more layoffs in the future and said, “There’s going to be more suffering before we can return to the good ol’ days since another cycle is on the way.”
However, entrepreneurship remains a bright point in our economy, and a less competitive labor market may encourage the expansion of more startups, given that change and volatility often result in innovation.