Venture Capital Benchmark
North America, Europe and Latin America
Q2 2022 was one of the most interesting and historic quarters for VC activity in recent memory
The public markets entered correction territory with the possibility of a recession on the horizon, and the private markets took notice.
Despite a general market slowdown, we know from prior experience some of the biggest and most successful companies were built during challenging economic times. There is much to cover from last quarter’s activity that applies to founders and VCs alike.
Welcome to our Quarterly VC Benchmark Report, where we analyze all of the notable VC activity over the past 3 months and stack it up against what we saw in the previous quarters and years. We scan across the US, Europe, and LatAm to bring you the best insights, be it you are an investor, founder, or just interested in the startup investing space. Let’s dive right in.
Q2 in a nutshell
Decline in funding, now what?
How should founders adapt?
Global VC activity saw a big drop
Q2 saw a noticeable contraction
Not since Q4 2019 has there been 2 consecutive quarters of VC contraction. The magnitude matters here: Q4 2019 saw a -15% decline in volume and -6% drop in deal count compared to Q2 of the same year. In comparison, Q2 2022 experienced a -32% slump in volume and -19% fall in deal count since Q4 2021.
It’s worth mentioning that Q2 2022 still produced $88B in deal volume across 6,138 deals, which in aggregate is still a staggering figure and topped Q1 2021. Compared to Q1 2022, this represents a -20% and -25% decline in deal volume and count, respectively. For YoY performance, Q2 2022 saw a -21% and -22% drops in both categories.
Behemoths back off
Some of the market contraction was driven by later stage funds tightening their belts. These massive funds typically make up a large part of the deal activity and volume each quarter, and in Q2 they pulled back from the market. Coatue Management (-24 QoQ deal reduction), Temasek (-14), T. Rowe Price (-10), D1 Capital Partners (-10), and Tiger Global (-4), amongst many other large funds, aggressively scaled back their deal count in Q2 relative to Q1 2022.
Ecosystem player’s perspective:
Gone are the days of raising enormous pools of capital and spending it aggressively to amass market share, even at the expense of profitable growth. Founders must focus on positive unit economics to ensure company stability and sustainability.
Extending runway is key right now - the winners often that emerge in the long term are not only the companies with the best product and teams, but are the last ones standing.
Focus on satisfying your customers. The companies that solve real problems and demonstrate strong user satisfaction and retention will attract investor interest.
We believe the current market environment presents an opportunity, not a time to duck and cover. Every venture firm is built differently, each with a different set of priorities and strategy. At TheVentureCity, we prioritize founder support above all else, and have structured our fund accordingly. Combine that with the good fortune and sense of being austere by design when deploying capital over the past 6 months (6 new investments and 3 follow-on investments so far in 2022 with dry powder available), we maintain strong views and perspectives on the current market environment:
VCs should prioritize portfolio company support above all else right now. This can take shape in financial backing, operational support, valuable investor and customer introductions, and anything else they require.
Staying true to our product-led growth mentality, we are actively investing and seeking the next amazing startups building the future. It is well documented some of the best companies are built during challenging market conditions, and we intend on taking advantage of that trend.
Most market sentiment is portraying doomsday situations, causing investors to proceed cautiously out of fear their new investments will struggle to raise follow-on financing. However we see a different situation playing out, which we will explore in the next section.
A market flush with capital
Things aren’t always what they seem
From all the news and media coverage of current market conditions, many investors and founders alike are convinced that capital is tough to come by. This is in part due to discretion by managers and not because of lack of capital in the market. Below is an illustration of historic fund capital raises dating back to 2013. We know over the past decade VC firms typically wait 2-3 years before raising new funds, and they deploy them slower during unfavorable market conditions. We can then reasonably infer there is $40B+ of dry powder available in the market from fund vintages dating back to 2020.
The reality of the capital markets is important for founders to understand, and if need be, inform VCs about. There are certainly unfavorable market conditions afoot that will tamper investment activity and make it more challenging to raise rounds, especially at attractive valuations. However, founders should breathe a sigh of relief that VCs raised massive amounts of capital in prior fund vintages and much of it is still sitting in the bank, waiting to be deployed.
The best and brightest companies will still receive strong investor interest. The bar has been raised, but companies solving urgent and real problems with novel products that have strong unit economics that are built by strong teams will get funded.
VCs may try to drive down valuations due to anticipated lack of competition, leading to perceived better negotiating power. Founders should start fundraising early (runway greater than 9 months) to put themselves in the position to command the valuations they deserve.
VCs generally have capital to deploy, and founders should be aware of this fact when moving towards closing conversations and considering potentially unfavorable terms.
Let’s Look At The Numbers….
US VC landscape in Q2 ‘22
US activity sinks to nearly $60B
The US was a microcosm for the entire VC ecosystem in Q2, as it represents the lion’s share of all funding. Total VC activity in the region slumped to $61.8B across 3,693 deals, a -21% and -20% decline QoQ and YoY, respectively. Despite this contraction, the US still represented 70% of all VC funding, consistent with last year. There were several noteworthy unicorns that raised: SpaceX closed a $1.7B round at a $125B valuation, Epic Games brought in $2B at a $31.5B valuation, and Faire attracted $816M from investors at a $12.6B valuation.
Europe VC landscape in Q2 ‘22
Europe the most insulated across all geographies
Across all the areas we cover, Europe fared the best compared to the rest. While the VC category as a whole shrunk by -20% QoQ, Europe generated $24.9B in volume across 2,266 deals, a -13% and -21% shrinkage QoQ and YoY, respectively. Some of the notable names that drove growth in the region were Trade Republic, which raised $1.2B on a $5.3B valuation, SumUp, which attracted $627M on a $8.5B valuation, and Personio which brought in $470M on a $8.5B valuation. One more note on geographic growth: of the top 10 largest deals from Q2, 6 of them (3 each) hailed from the UK and Germany.
LatAm VC landscape in Q2 ‘22
LatAm activity continues to tumble
Latin America was hit hardest by recent market conditions. From a high in Q3 2021 of $4.8B poured into Latin America startups, that figure has fallen to $1.5B across 179 deals in Q2 2022. Q2 2022 represents a -57% decline QoQ and -40% drop YoY. Anecdotally, we have heard US investors are focusing on portfolio company performance, and when they invest in new companies they often are based nationally.
We view the pullback in VC activity in Latin America as an opportunity for us and other investors to partner with some of the best founders in the region. LatAm has continued to prove itself as a region ripe for innovation and capable of minting massive success stories
The fundamentals and drivers of growth in the region have largely remained the same (as discussed in our Q1 2022 benchmark report) - fintech, growing internet adoption, and high cell phone penetration are allowing business to flourish.
We at TheVentureCity are excited to continue to partner with Latin American founders who are building tomorrow’s unicorns.
Same verticals lead, but new ones emerge
Investors play their hits
Venture investors wired $88B to startups in Q2, almost $62B of it going to just 3 verticals, a whopping 70% majority. SaaS ($22.2B), TMT ($20.9B), and Fintech ($18.8B) proved to be popular amongst founders and investors and regarded as the safest, sustainable growth plays in this environment. SaaS, especially at the enterprise level, was regarded as one of the best places to invest, and outpaced TMT, which led in Q1 2022. In uncertain environments, investors typically look to safer bets characterized by recurring revenue, high margins, and proven business models - all characteristics of SaaS businesses. However, new entrants entered the top 7 - CleanTech ($7.3B) and Industrials ($6.9B) saw expanded activity and replaced Big Data and Supply Chain Tech from Q1’s top vertical rankings.
Web3 and Blockchain
Peeling back the curtain
Crypto saw massive setbacks in Q2
Despite the continued interest in Web3 deals in Q2, it was no secret crypto underwent a difficult period in what many industry players called another “crypto winter”. As a proxy for interest and adoption in the space, we can look to Bitcoin’s price as one way of assessing the health of the industry. Bitcoin topped over $67k in mid Q4 2021, then tumbled to the high 30k’s/low $40k’s for a few months in Q1.
This wasn’t a massive cause for concern
Florida insulated in Q2
Florida, overall, continues to see strong long-term growth
Like the rest of the VC market in Q2, Florida took a hit in funding levels. However, it was less severe than most other markets and still elevated in the perspective of long-term health of the regional industry. Investors poured $1.7B across 159 deals into Florida-based startups, just a -8% drop QoQ and a massive 126% increase YoY. The results are telling: Florida continues to develop as a startup hotbed and many exciting founders are building in the region.
The weather isn’t the only hot thing in Miami
Miami presents a unique opportunity for crypto investors to build a reputation in an emerging hub. It is well documented Silicon Valley produced prestigious VC funds because they were located close to the companies being built there - the capital was second to the region behind the talent.
Spain funding drops in Q2
Spain sees decline, but optimistic growth long-term
Spain, like most regions on the planet with startup activity, was not insulated from the broader market pullback in Q2. Spain produced $679M in funding volume across 112 deals, a 38% slump QoQ. However, this short-term performance is not an indicator of how far the region has come: $679M Q2 funding represents a 41% increase YoY from Q2 2021. Combine that with the fact that deal sizes jumped from $2.7M to $6.1M in just one year, and one can see that Spain is growing quickly in terms of fundraising activity, and companies in the region are maturing and raising larger rounds.
Madrid minting companies on the rise
Brazil’s performance in Q2
Brazil hit hard by market slowdown
Brazil unfortunately suffered a large pullback in funding for startups in its region in Q2. Q2 produced $634M in volume across 85 deals, which is a -62% decline QoQ. Brazil’s funding volume topped in Q4 2021 when it crossed the $2.7B threshold. This two-quarter drop represents a -76% decrease in funding volume. Compared to 1 year ago, Q2 2022 produced 66% less capital injected into startups. These numbers are disappointing given the level of excitement in the region in prior quarters and the quality of startups building in many areas of Brazil.
São Paulo boasts more unicorns
Although Q2 produced low funding numbers in Brazil and LatAm as a whole, we are still bullish on the region and eager to support founders from these geographies.
Spotlight: Women in VC
Investment for female founders
Female-founded companies see setbacks, but in line with market
Startups with at least 1 female co-founder saw a drop in funding in Q2, these startups produced $10.4B in capital inflows on 799 deals. This was a decline QoQ of -21% and a drop from a relative high 2 quarters ago of $15.4B (-32%). These percentage drops are consistent with global VC flows, showing that female co-founded companies are not receiving disproportionate negative treatment compared to their male-only counterparts.
However, that does not detract from a general problem: female co-founded businesses still only represented 12% of the Q2 fundraising market and female-only founded businesses hovers around 2%. Much more work needs to be done for investors to back female-founded businesses, to proactively support women in the C-suite, and to encourage women to found businesses.
Female founder spotlight
Female founders on the rise
Diving deeper into the stages tells us what’s happening at ground level...
Seed not insulated from rest of the market
Even seed companies could not avoid the effects of a slowing VC market. Despite seed companies being far from the IPO markets in terms of company profile and investor type, seed investors took notice of general capital market slowdown and adjusted accordingly. Investors are conscientious that Series A and B investors will demand strong unit economics and paths to profitability as prerequisites to getting follow-on funding. It will become tougher to raise new, large rounds based on pure vision and market opportunity. Q2 2022 saw a drop in seed funding to $6B across 1,750 deals, representing a -23% drop in volume QoQ. Deal sizes remained fairly consistent from last quarter at $3.4M/deal ($3.8M/deal in Q1). The overall sentiment of the space isn’t all bad - YoY growth was still positive at 11%.
Early-Stage continues to tumble
Early-stage deals (Series A & B) went on a tear in Q4 and 2021 as a whole as valuations continued to expand across the industry. Investors established a new standard of what’s possible in terms of capital deployed and the rate it could be invested. Q2 is a far cry from two quarters ago and the space has returned to a state of normalcy. Series A and B deals produced $24B in funding volume across 1,857 deals, a -16.4% decline QoQ - more insulated from the rest of the industry. However, this number is a far cry from Q4’s $39.5B figure, which represents a 39% contraction in two quarters.
More of the same
Evaluating investors by activity
Even though the metrics changed QoQ in terms of activity, the names did not. Over the prior quarters we highlighted how mega funds are moving downstream to the Series A & B stages and using their robust capital reserves and networks to deploy capital at impressive clips. Despite some recent lackluster performance (to be discussed later), much of the dry powder in the market is concentrated in a small number of mega funds, allowing them to deploy capital at a fervent rate. Last quarter the most active investors at early stage were a16z, Dorm Room Fund, Lightspeed Ventures, with other notable names like Insight, Sequoia, and Coinbase Ventures cracking the top 10. Q2 looked relatively similar: the top 5 funds by activity were Insight Partners (23 deals), Alumni Ventures (22 deals), Tiger Global (21 deals), followed by YC and a16z.
Late-Stage comes in for a bumpy landing
In 2021, late-stage VC boasted one of the most impressive growth clips of any asset class ever - more than doubling in the matter of a year. On the back of this, 35 funds raised over $1B in just the first half of 2022 (the largest being Insight Partners’ $20B 12th fund). However, capital deployment is slowing as late-stage deals depend on healthy IPO markets. If these slow, then investors may slow deployment in companies that would theoretically IPO in the next 1-3 years. Late-stage deal activity for Q2 arrived at $57.6B across 1,886 deals, falling -21% QoQ and -29% from its Q4 high.
Big funds hit hard
It’s lonely at the top
Industry Spotlight: Crypto
What went wrong in Crypto?
In 2021 Web3 and crypto was on a tear. Companies in the space were raising at astronomical valuations, talent was pouring into the space, and investors flocked to bid up the best deals. What could go wrong?
What has unfolded in the past few months has been nothing short of jaw-dropping. Companies are folding and bad operational practices are rampant. Warren Buffet’s famous quote rings true: “Only when the tide goes out do you discover who’s been swimming naked”. We will cover some of the most notable stories from the past few months, and how we as an investors are going about navigating the environment moving forward.
A collapse of epic proportions
What was the Terra network?
How did TerraUSD (UST) and LUNA work?
Unlike other major stablecoins like USDC (USD Coin) and USDT (Tether) that depend on a reserve of assets to maintain their peg to the dollar, UST utilized a smart contract-based algorithm to maintain UST anchored to $1. To do this, Terra had a counterpart coin, LUNA, to counterbalance any discrepancy in supply and demand. Users could always swap LUNA for UST, and vice versa, at a guaranteed price of $1. For example, if there was excess demand for Terra and the price rose above $1 temporarily, LUNA holders could bank a risk-free profit and swap LUNA for Terra. When this happened, a percentage of LUNA would be permanently removed from circulation and some would be deposited into a community treasury. These actions would make LUNA more scarce and more valuable, thus increasing the price of LUNA. Since more users exchanged LUNA for UST, minting more UST tokens would devalue it and bring the price back down to $1. Due to growing demand for UST over time, that ensured UST would increase in market cap, causing LUNA to increase dramatically in price. LUNA at its peak had a market cap in excess of $20B.
How did it all come crashing down?
The rise and fall of one of crypto’s biggest lenders
From $25B AUM to bankruptcy
Celsius, at its height, was one of the largest crypto lenders on the planet. Users would create wallets on its platform and then Celsius would invest the capital into yield-generating assets, and then distribute most of the returns to shareholders. In some cases, Celsius claimed users could generate 18% yield on their deposits. However, by June 12, 2022 Celsius was forced to pause all withdrawals due to liquidity issues and faced insolvency. What went wrong for Celsius as a centralized financial lender:
A hedge fund caught holding the bag
Three Arrows Capital closes shop
What we can learn from this