Manatt Ventures VC Market Update – August 2023

Client Alert

The Manatt Ventures team constantly evaluates changes in the market, both for our clients and for the Manatt Venture Fund, our internal venture capital (VC) fund. Below are some of the more interesting data points and perspectives we have come across lately that have helped inform our perspectives.

In this edition, we are looking at the lack of funding for emerging managers and potentially related knock-on effects in the market for early-stage companies.

Emerging Managers Struggle to Raise Funds

As we noted in our last analysis, VC fundraising fell off a cliff in Q1. We’re now seeing that emerging managers are being hit the hardest, according to PitchBook’s Q2 analysis. While 765 emerging manager funds were raised in 2021, that number started to decline to a more normal 442 in 2022. However, only 56 have been raised in 2023 as of April, a marked decline that may be impacting early-stage funding opportunities.

Emerging managers historically have tended to invest more in early-stage companies. With many early-stage funds deploying capital in the recent high-valuation years, there is an expectation that there is less dry powder left over from prior funds available. Compound that with fewer new funds being raised, and early-stage founders are left with fewer options for venture capital from emerging managers.

Early-Stage Funding Plummets

In related news, funding for early-stage companies has continued to fall, in both value and number of deals. The latest Venture Monitor report has angel and seed value falling for a fourth straight quarter and deal counts falling for a fifth straight quarter as of Q2. The combination of companies holding off on raising (hoping for a better climate), a return to a more standard diligence process by VCs (extending timelines for rounds) and fewer startups being created (see the next section) is creating down metrics for early-stage activity.

Fewer Startup Companies

While funding headwinds have presented many challenges for early-stage founders, early-stage VCs are facing issues of their own. The number of new startups has been on a steep decline since 2020, with an estimated 86% decrease from 2020 to 2023, per Crunchbase. In 2020, there were 6,424 new startups created in the United States. That figure is forecast to decline to 1,046 by the end of this year. It’s not just a United States problem, either. Israeli startups are projected to decline to 34 new companies this year, down from 333 in 2020. The European Union will similarly decline, from 5,147 new companies in 2020 to an estimated 640 this year.

This dearth of new companies leads to a lower denominator effect, further impacting the early-stage deal count decline noted above. It’s too early to say when things will normalize, but the current projections are pessimistic through the rest of 2023.

A Thawing for Public Exits?

On a more rosy note, it appears we are finally seeing a slight thaw in exits via public markets. Cava, the Mediterranean fast-casual restaurant chain, went public in June at an IPO price of $22 per share. Since then, the share price has hovered between $36 and $58 per share, an overwhelmingly positive response and a welcome sight for many in the venture community. Exits in Q4 2021 resulted in over $200 billion in value via more than 500 exits, according to PitchBook. That number dropped to under $50 billion in Q1 2022 and has fallen every quarter for six consecutive quarters through Q2 2023. With Cava and SurfAir testing the IPO market, we can hope this is a sign of things to come, as the backlog of late-stage venture-backed companies continues to grow.

Both Instacart and Arm have reportedly started moving forward with plans to IPO this fall, potentially as early as September. Instacart, the grocery delivery company, had plans to IPO in 2022 but put those on hold as the public markets continued to struggle. It has apparently decided that market conditions have improved enough to go back out, albeit at a much lower valuation. The company was previously valued at $39 billion in 2021, but recently valued itself internally at $12 billion. Arm is reportedly seeking a more than $50 billion valuation when it goes to market, with SoftBank recently valuing the company at $64 billion as it bought out the last 25% of the company it did not own.



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