The Data Behind Venture Capital’s 3-Year Roller Coaster Ride

Venture capital is a vital source of financing for startups and early-stage companies looking to bring their innovative ideas to life. It’s a high-risk investment with the potential for huge returns, so volatile markets, global instability, and a cooling economy can affect how VCs write checks.

We’ve seen all of those factors come into play over the past three years, and the influence on VC is pretty clear. 

The onset of the pandemic caused some stalling across the board, but 2021 saw a record-setting comeback in VC investments. We saw a clear retrenchment in 2022, dropping back closer to 2020 levels as the year ended — mirroring the macroeconomic uncertainty we’ve experienced. What does that three-year swing mean for what’s ahead in 2023?

We track funding data within the ZoomInfo platform. To understand how VC funding has changed over the last three years, we analyzed verified global capital raises that had a public announcement, excluding self-reported capital raises. Here’s what we found. 

VC Funding Look-Back

The total number of VC funding rounds started off flat in the first two quarters of 2020 as the pandemic took hold. But as the year came to a close, optimism appeared to rebound. With the creation and distribution of vaccines, investor confidence seemed to increase, along with a willingness to fund new projects, causing a surge in the last quarter of the year in total amount and rounds of investment. The total for the year was over $148 billion with 3,570 funding rounds.

2021 saw the most funding over the past three years, both in the amount and number of funding rounds. The year’s total funding was $330 billion — more than double that of 2020 — with 5,622 total rounds of funding. The third quarter saw the highest total amount of funding at $88.76 billion, over 27% of the annual total, with 1,457 rounds.

Venture funding slowed dramatically in 2022, but still remained above 2020 levels overall. For the year, we tracked 4,573 rounds totaling $220 billion — a 33% decrease in the amount of money raised and a nearly 19% drop in the number of deals from 2021’s record highs

While the year started off strong, dealmaking fell off considerably by Q2, and slid back below 2020 levels by the end of the year. 

Over the year, almost every series decreased by more than half. But interestingly, the average deal size for series A funding rounds actually peaked in Q2 and the total yearly average surpassed previous years at over $22 million, even though the funding rounds were at a two-year low of 443 total rounds.  

Why Was Series A Average Deal Size Steady in 2022?

Some of the biggest startup success stories were born during or shortly after recessions, including Microsoft, Slack, Instagram, and Uber. Startups can take more than 10 years to reach an investment “exit,” depending on which category they’re in, which means they must be able to withstand the kind of drastic changes to investor sentiment that we saw in 2022.

Additionally, many of today’s tech startups try to operate with a lean workforce and be as nimble as possible, pivoting when necessary. 

The story of Series A funding in 2022 indicates that investors still have faith in the future of startups, even during economic uncertainty. While the number of Series A deals dropped each quarter, the average deal size held relatively steady, indicating a healthy investor appetite for the most promising early-stage companies.

Notable Numbers

Over the past three years, the largest single investments occurred in banking, software used by engineers, and motor vehicles, and the highest number of investments were seen in business intelligence software, software development, and software and technical consulting. 

It’s not hard to see how world events played a hand in these investment decisions. In a heavily virtual work environment, technology became more necessary to bridge gaps, connect teams, and satisfy customers. Business intelligence software and consulting services became much more necessary to make data-driven decisions and help companies understand their performance in an uncertain market. 

Additionally, we saw an increase in healthcare software and security software investments, an obvious sign of the times.

OK, so …

There are a couple takeaways from the ups and downs of VC funding over the past few years. Some analysts predict private equity will hold the most power in the future of mergers and acquisitions, and that the mid-stage market will rebound. Others believe that the economy will remain difficult in 2023, but that it will yield more strategic and resolute founders, creating better investment opportunities in the future. Here’s what matters for your company, regardless of these outcomes.

Technology is Still a Good Bet

While there’s volatility in the market, constant innovation and technological advancements are moving every industry forward. And though we’ve seen some market conditions that may make folks generally weary about the future of tech — namely, layoffs across the industry — tech has and will continue to push game-changing innovations across all industries.

Profitability Matters

When growth is prioritized over profitability, it’s easy for budgets to get out of control. Growth over profitability will likely face a higher bar of scrutiny as capital gets more expensive.

Investors and board members may become more likely to expect companies to turn a profit while maintaining a stable growth trajectory. When economic conditions take a turn for the worse, profitability can make later-stage startups more appealing to investors and help public companies withstand the steepest budget and headcount cuts. 

All things considered, it’s still shaky ground, but there are still reasons for optimism. And recessions can be an opportunity to grow if you remain targeted in your go-to-market approach and focus on the data at your fingertips. ZoomInfo can help you do that. Schedule a demo to see how.