Investment reports

LA Venture deals rebound slightly in Q3; VCs remain cautious

While the rest of the United States remains in a downturn in venture capital investment, Los Angeles is slowly recovering from a slump in the previous quarter, but remains far from the banner year it had in 2021.

Analysts from PitchBook Data Inc. and the National Venture Capital Association found that nationally, investors are still nervous, investing in fewer deals and cutting smaller checks. Total money invested in the United States in the third quarter hit a nine-quarter low of $43 billion, and the number of deals also fell across all sectors, down 20% from the first quarter this year. year, according to PitchBook’s latest Venture Monitor report for the month of July through September.

Companies that target sales also see exit activity drop. PitchBook noted that 2022 release activity has been “sluggish” and said the company’s combined sales value so far this year is on track to fall below $100 billion for the first time. times since 2016. Of all exit revenue generated so far this year across the country, PitchBook found that nearly 50% of that value came from acquisitions.

Only 59 IPOs have taken place so far this year, compared to a record 303 venture-backed companies that went public last year. PitchBook reported that only five companies went public through traditional IPOs during this third quarter.

In Los Angeles, however, there might be a light at the end of the tunnel for investors and startup founders. The number of deals closed in the third quarter was 321, and the overall deal value was $7.1 billion. That’s an increase of about 39% from the previous quarter, in which venture capital firms invested $4.8 billion in Los Angeles startups across 278 deals.

“I think a lot of capital is on the sidelines,” said Tarek Waked, founding partner of West Hollywood-based Type One Ventures. “Things are slowing down, people are spending less. [Limited partners] are more risk averse with their money.

Nonetheless, according to PitchBook, LA saw some of the most highly valued deals last quarter. Its average deal size was around $15 million, slightly behind the Bay Area, but larger than other key metropolitan areas like New York or Boston.

But not everyone feels the momentum. The female founders of Los Angeles have had a tough year so far. PitchBook recently began tracking capital raised by companies with all-female founding teams and found that they’ve only raised a total of $1.9 billion so far this year, far behind New York. and the Bay Area, where the founders raised $4.9 billion and $5.5 billion, respectively. PitchBook reported that “Amid an economic downturn, companies founded by women are receiving less capital.”

“The narrative of the venture capital downturn that has been ubiquitous in the market this year has finally materialized in the data, with nearly every metric except fundraising down sharply in the third quarter,” he said. said PitchBook CEO John Gabbert in a statement Thursday. “The venture capital ecosystem, however, has shown remarkable resilience in the face of persistent economic headwinds, raising record levels of capital and closing a surprisingly high number of deals.”

The so-called slowdown could just be a correction, or a regression to the norm, after the record highs of 2021.

“In many ways, 2021 has been an outlier year, and the venture capital market is now returning to pre-pandemic levels and long-term trends of steady growth,” Gabbert said.

Although they did not distribute checks at the same generous rate in the past, VCs continue to raise funds at a rapid pace. National venture capital fundraising so far this year is already surpassing last year’s record – PitchBook found that venture capital funds set a new annual high of around 151 billion raised throughout 2022, compared to $147 billion raised throughout 2021.

“I agree that there is a lot of venture capital money that has been raised that needs to be deployed,” said Minnie Ingersoll, partner at Los Angeles-based TenOneTen Ventures. “I personally think that as valuations come down and we get back to ‘normal’ multiples, it should be a great time to deploy capital.”

According to Waked, some investors seem to be trying to ride out the storm because the markets have been subject to such volatility over the past year. But he expects that to rebound soon, adding that “once that uncertainty subsides, I think you’re going to see a slight uptick.”

While the broader business community could experience a downturn, Waked said that in its specific investment areas, including space and deep tech, investment is showing no signs of slowing down.

“I’m not blind to the state of the world and the market,” he noted. “But I think as a VC you are ultimately an optimist… You invest in upside potential, not downside potential.”

Ingersoll said the slowdown appears to be hitting late-stage businesses in particular.

“We haven’t seen a slowdown in our pipeline or our pace of deployment, but I’m seeing it and hearing about it from later-stage companies — both in our portfolio and outside of our portfolio,” Ingersoll told dot.LA. “In the growth phases, it’s more obvious which are the breakout companies and most of the very good growth companies created in 2021. Also, if a company has a lot of leads, they wouldn’t choose to go into the market to increase now.”

Ingersoll predicted more layoffs could hit tech in the near future; she added, “another round is coming and so there is going to be more pain before we get back to the go-go days. That said, entrepreneurship continues to be a beacon of hope in our country and a less tight labor market could allow for greater startup growth, as we know that times of change and turbulence lead to innovation. .”

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