Venture Capital Benchmark Q3 2022
US, Europe & Latin America
Q3 2022 was one of the most interesting and historic quarters for VC activity in recent memory.
For those of you who have been reading our VC Benchmark Reports in succession, this one will be a bit different as this past quarter of startup and investing activity was far from the norm. There is a large degree of uncertainty that comes with early stage investing - that is what makes it risky and rewarding, and at all times exciting. However, in more stable market conditions, investors tend to behave differently, each investing with their own view of the world and sectors they prefer. Thus, investors typically expose themselves to specific idiosyncratic risk based on their investment theses - risk associated with specific companies and sectors.
The past quarter was characterized by market conditions that were less than stable. We could point to any number of factors that caused a drought in funding activity. We thought it prudent for this VC Benchmark Report to include a wide range of perspectives outside of our own. Last quarter we crowdsourced this living document for founders to help them navigate this choppy fundraising environment. This quarter we called upon our entire founder and investor ecosystem to bring you insights from around the globe on what happened in Q3 2022. To help us with this task, we utilized Beams’ (one of our portfolio companies) new product - an excellent tool for collecting B2B feedback.
Welcome to our Quarterly VC Benchmark Report, where we analyze all of the startup and investing 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 begin.
VCs take the summer off.
Market conditions the past 3 months spooked investors across the board and most all of them followed in suit. VCs from pre-seed to pre-IPO sheltered in place from new investments and focused on supporting their existing portfolio founders.
Common questions we would hear from other VCs over the summer were along the lines of: “How active have you been the past few months?” and “What are you seeing in the market in terms of round dynamics and valuations?”.
When we asked those same questions to investors, we heard some consistent themes:
Many investors sat on the sidelines this summer and were in “wait and see” mode. Macroeconomics factors caused many investors to pull back from the market entirely.
Investors across the board imposed valuation compression and prioritized repeatable, recurring revenue and business models. Fundamentals immediately became the priority again for many investors.
We saw many investors focus primarily on their portfolio founders. This came in the forms of operational support, insider rounds, and extensions of prior rounds at the same or similar terms.
Ecosystem Member perspective
Eduardo García Fernández is an investment banker at LionTree based in NYC and was previously a 2x founder, giving him a particularly unique perspective on building businesses. He has his finger on the fundraising and M&A market pulse considering his depth of work with startups. He summarized the environment we are in well:
Ecosystem Member perspective
We saw founders with impressive traction, teams, and products being passed over in Q3, when in other fundraising environments there would have been feeding frenzies. We empathize with the challenges founders are facing today, being former founders ourselves, and continue to dedicate resources to help them.
We crowdsourced a living document for founders from our community of founders and investors that touches nearly every aspect of operating a startup. Many of us at TheVentureCity have lived through multiple market cycles (.com bubble, financial crises) and wished we had a community of founders and investors to support us when we built our first companies.
The ultimate lesson from this document is that the strong ultimately survive and build lasting, enduring, profitable businesses.
We publicly launched our Growth Scanner, a free data platform to help founders understand their customer data better, and thus scale faster. If you are in the early stages of understanding your customer behavior or moving towards product-market fit, we believe this product can be transformative!
Katya Skorobogotova is our Growth Operational Partner and expert on all topics related to growth. She has a storied career as a growth operator at Facebook, Instagram, and Whatsapp and now one as an investor. She shares her insights on the challenges founders have faced in the below Beams clip as it pertains to dealing with devaluations as a result of growth obstacles, especially for consumer companies.
Q3 2022 funding volume peaks above $60B
The numbers are in, and Q3 2022 failed to produce in line with previous quarters. Despite VC funds having massive capital reserves and commitments (to be discussed later), it did not translate to startups receiving much needed funding.
The market and fundraising conditions are less favorable for founders, especially compared to those in 2021. Even venture-backed founders with quality investors are often pursuing extension rounds or rounds with discounted valuations as a result of the fundraising environment.
In addition to the living document for founders we mentioned earlier for support on the operational side of things, we can offer these tokens of advice from what we have seen:
Control what you can control. Markets move in cycles and the timing of your raise is to some degree luck of the draw. Optimize for profitability, extend runway, and focus on core revenue-generating activities that will maximize your LTV/CAC.
Certain fundraising strategies can help increase your chance of attracting the best investors, closing quicker, and commanding higher, more fair valuations. Some include:
Lining up investor conversations all at the same time (within a couple weeks), scheduled far in advance. Taking this step in advance will allow you to crystallize your pitch and give the impression you are speaking with many interested parties.
Asking existing investors and close supporters for specific introductions based on criteria of certain funds. Funds like founders that do their homework and know why they want to partner with them.
Start talking with funds before you are ready to fundraise. This will provide a more relaxed context for the conversation and allow investors to get familiar with you before they have to commit capital. Also once you go back to them for commitments, they will have already socialized your business with their team, allowing for a faster time to close.
Creating momentum and urgency, especially in this market, is key to a quick close. Considering a first close at a lower valuation with a second close at a higher valuation (blended closes to achieve your target valuation) can help interested parties move quickly to capitalize on better economics.
Portfolio support right now is paramount. We have advised our founders to create 18-month plans to reduce burn, operate for profitability, extend runway, and raise rounds at similar terms if necessary.
Extension rounds serve to hit north-star KPIs in order to raise large rounds in the future when fundraising conditions improve. Beyond portfolio support, we see tremendous opportunity in the market right now, and feel fortunate to be in the position to actively deploy capital.
We are seeing amazing founders raising rounds at attractive valuations where we can take lead positions and provide our full toolkit of operational resources and expertise.
We aim to deploy a significant portion of our first-check liquidity in the short to medium term to capitalize on this fundraising environment and support founders when they need it most.
VCs sitting pretty
VCs have raised record amounts of capital and are sitting on approximately $290B of dry powder as of the end of June 2022. This has created a waiting game - founders are in need of funding to grow and VCs need to deploy to achieve top quartile vintage performance and return capital in a judicious amount of time to limited partners.
However, market conditions have made investors careful of deploying in fear of poor short-term performance and inability of new portfolio companies to raise future rounds. Effectively, these funds will start to exponentially deplete when investors decide market conditions improve to support further growth, the question is when?
Again, we emphasize control what you can control. From our conversations with founders we constantly hear questions around where we are in this market cycle. For now, founders can only continue to execute and take the appropriate steps to fundraise if necessary and elongate runway. We see the avalanche of VC capital tumbling in the next 1-2 years, and the startups situated appropriately will capitalize in a big way.
Let’s Look At The Numbers...
Not the beat drop we wanted
Q3 produced almost $45B in funding across 3,636 deals in just the US. Even though this number on its own seems impressive, compared to the $72B from last quarter and the $84B from Q3 last year, it’s indicative of more selectiveness among VCs when deploying capital.
Our founder and CEO, Laura González-Estéfani echoes many of the sentiments Cheryl holds. In the below Beams clip she emphasizes the importance of founders to focus on product, data, customers, and being optimistic.
Europe not immune to investor sentiment
Europe saw relatively unaffected funding levels last quarter, a welcoming sign given how market conditions began to worsen at the tail end of Q2. However, Q3 saw some level of pullback that we didn’t see in Q2.
Luigi Lenguito is the Founder of Bfore.AI, a cybersecurity startup out of France. He shares here in the below Beams clip his fundraising experience after raising a round in July 2022 and his view that investors are still deploying capital, but seeking the best opportunities where founders are delivering on their milestones.
Álvaro Sanz Sieteiglesias is our Investment Director out of Madrid and previously ran a VC-backed startup. He has raised and deployed capital in varying fundraising environments. When asked about today’s market conditions, he stressed in the below Beams clip the importance of keeping perspective and founders to focus on solving big problems and building world class teams.
LatAm rebounds and sees uptick from Q2
Latin America was the first geography to feel the pullback from disruptive market conditions. Investors abroad quickly focused on startups in their own geographies close to home, leaving a void of capital in Q2 for LatAm.
We continue to be bullish on investing in Latin America. LatAm is one of our core markets for several reasons:
Growing adoption of software solutions, exponential rate of digitization of core business operations, fintech leading the region from funding perspective, thus becoming the backbone of the startup ecosystem, and a population hungry to uplift its quality of life.
We view the drop in funding from the peak a year ago as a product of market dynamics and investor pullback rather than lack of startup innovation and production. We are eager to continue supporting founders and deploying in the region.
Industry spotlight: Web3 and Blockchain
Funding for Web3 and blockchain startups comes back down to earth
Even Web3 proved to be unable to withstand the forces of the market pullback. Even while still expanding from Q1 to Q2 to an all-time quarterly high in fundraising volume, Q3 saw a dip to near Q2 2021 levels.
After seeing continued growth in Q2, Florida regresses to the mean
Like the rest of the VC market in Q3, Florida took a hit in funding levels. However, it was less severe than most other markets and still in line from the perspective of long-term health of the regional industry.
Investors poured $1.5B across 155 deals into Florida-based startups, -37% QoQ but only down -1% YoY. The results are telling:
Florida saw a relative peak in Q2 for funding but Q3 funding represents a sustainable trend of long-term interest in the region given the magnitude of dollars being deployed in the region.
Miami’s place in the tech ecosystem has been permanently cemented since the pandemic. Even though much of the fear from COVID-19 has subsided, the startup and funding activity in Miami has stayed. The pullback in funding in Miami is in line with the rest of the market, and we continue to see excellent startups being born in Miami. Some reasons we continue to be excited about investing in Miami are:
Large funds permanently moved headquarters/portions of their operations to Miami. That shift takes time and investment to complete and is difficult to reverse. Those funds, along with the investors that have been here for several years, will only add to further investing activity when investors seek to invest in their local jurisdictions.
Startups, like our portfolio company SimpliRoute, have set up operations in Miami in droves, and thus talent has shifted there and away from traditional tech hubs. This activity creates a flywheel: when talent moves to an area their friends and peers do too, which only further increases the quality of talent in the area and thus incentivizes more companies to hire from Miami.
Miami has well-documented advantages that make it attractive for young tech workers and companies. Weather, low taxes, and nightlife are just a few. Miami has the right infrastructure to support an emerging tech hub.
Spain unaffected QoQ
Spain funding flat and sees reasons for optimism
After a massive influx of capital in Q4 2021, funding volume in Spain has been tamed and reverted back to a manageable level. Spain saw no indicators of pullback in the short term from an investor sentiment perspective.
Q3 2022 saw $562M deployed across 106 deals, virtually in line with last quarter. Interestingly, deal sizes were noticeably larger in Q3 compared to Q2, $5.3M compared to $3.8M from the quarter prior.
Although just one data point, funding volume and average deal size paint a positive indicator for Spain: startups emerging from the region continue to provide attractive opportunities to seek returns and investors are bidding up valuations for the most interesting companies. We saw this clearly in Q3, and notably for Madridian startups!
Madrid startups fuel funding
Big deals are getting done in Spain, the largest hailing from Madrid
Even though we primarily invest at the pre-seed, seed, and Series A stages, we constantly monitor the biggest deals in our core geographies as large deals can act as catalysts for investors to look deeper into otherwise ignored regions. Q3 served as one of those moments - the 3 biggest deals of the quarter out of Spain all hailed from Madrid!Seedtag led the way with a massive $256M round led by Advent International, likely at a high 9-figure or 10-figure valuation (led by Eduardo García Fernández from LionTree, who is quoted earlier in the report). Cabify, one of our portfolio companies, raised $136M in fresh funding at a $1.5B valuation. Playtomic rounded out the top 3 of largest Q3 deals from Spain with a $59M Series C at a $357M valuation. Madrid clearly continues to show that it is an emerging tech hub in Europe, and we are proud to back many founders from the region.
Brazil sees further setback
Brazil affected by market slowdown
The narrative anecdotally coming from US-based investors has been due to the macro environment, many are focusing on supporting portfolio companies and pulling back from geographies they are less familiar with.
Brazil unfortunately exemplifies that reality - investors deployed $519M across 76 deals in Q3 2022. That represents a -44% decline in funding volume QoQ and a -65% drop YoY.
São Paulo leads the way
Despite unfavorable market conditions, São Paulo boats more success stories
We have said it in prior benchmark reports and we will say it again: São Paulo is the hotbed of innovation in Brazil and Latin America. Of the top 10 largest deals in Brazil from Q3, 8 of them were from São Paulo. Solfácil, a solar fintech platform, raised the largest round in Q3 from Brazil - a $130M Series C. Some other promising companies from São Paulo that raised this past quarter include Carbonext ($41M Series B), Dr. Consulta ($32M Series D), and BHub ($30M Series A).
Despite investors broadly pulling back from the market, massive VC deals are still getting done in Brazil, and namely in São Paulo. We are proud investors in the region and view this time as a fantastic opportunity to continue to support founders in the region before funding levels and valuations explode in the region.
Women in VC
Female-founded companies see reduction in funding, but less than the market
Q3 offers mixed sentiment around female founder investment activity. From a positive spin: funding volume for female co-founded startups dropped -23% QoQ, which when compared to global and US declines in funding of -36% and -38%, respectively, was less relative to their all-male counterparts. However, Q3 still only produced $8.2B in capital deployed into 734 female co-founded startups. We can draw two main conclusions from this data:
Female co-founded startups received a paltry 18% of all VC funding for the quarter, clearly showing there is a long way to go to achieve capital parity in the VC ecosystem. The discrepancy becomes even more apparent when considering funding for female-only teams: just 1.9% of all VC funding for Q3. [Insert Tweet Button]
Maybe even more surprising is deal sizes considering founding team makeup. VCs have deployed $13.6M/deal on average across all US deals in 2022 and $11.5M/deal for deals with a female co-founder. This actually represents a relatively small margin of difference considering the magnitude of disparity between these two groups in terms of pure funding volume. However, VCs have deployed a meager $4.9M/deal on average into female-only founded startups. We can infer from here that not only are female-founded startups not receiving proportionate capital to their male-only counterparts, but when they do receive it, it is much less, especially if there are no men on the founding team.
Female VC spotlight
Disrupting an all boys club
As a female-founded fund, we know all too well that there is disparity between women and men receiving VC funding and lack of representation of women at VC firms. Amongst US VC firms, only 12% of decision makers are women and 65% of firms still do not have any female partners. For this reason we look to identify and highlight other sharp, cutting-edge female investors who command respect in the VC space due to their experience and expertise.
One of these investors is Itxaso del Palacio from Notion Capital. Itxaso elaborated for us how she likes to invest and why she believes product-led growth is a great way to build a business.
We are proud to support female founders like Shail Mehta, who is building a revolutionary company solving a core human problem in TheLastGameboard.
Even in 2022, we observe female founders are ignored and do not receive the capital support they deserve for the amazing companies they are building. Change is happening, but it needs to happen more aggressively on the cap table, in the C-suite, and in the boardroom.
We are proud that we have the ability to make meaningful change to address the disparity of funding for female-founded startups. We believe this is one of our core differentiators and competitive advantages.
Diving deeper into the stages tells us what’s happening at ground level...
Seed slips further
Seed deals saw a decline in line with the rest of the market, albeit slightly less severe. Q2 saw a -13% drop QoQ, and Q3 was more of the same with a -21% compression to $6.3B in total funding over the quarter.
Average deal size came in at $3.9M/deal, which was actually up from $3.3M/deal in Q2. These data points intuitively make sense: seed companies still need the necessary capital to grow aggressively and expand, and for the right companies with attractive risk/reward profiles, investors are deploying when they have conviction.
However, clearly that bar for conviction has continued to rise as investors become more selective.
Andrés Dancausa is General Partner at TheVentureCity out of Madrid and prior to becoming an investor he founded 2 companies.
Between his entrepreneurial experiences and working with hundreds of startup founders as an investor, Andres understands how founders should prioritize and spend their time when building at the seed stage. In the below Beams clip he details the importance of putting teams together by hiring for quality and focusing on business fundamentals.
Early-Stage sees setback
From last quarter we commented that the effects of the public market meltdown would likely first reach late-stage deals, followed by trickling down to early-stage deals as capital deployment begins to dry up.
We saw that play out in real-time in Q3. Q2 was largely unaffected compared to Q1 - down just -1% QoQ. However, Q3 2022 was a different story as funding slipped to $13.3B across 549 deals, a -39% drop QoQ. Again what’s noticeable is deal sizing: Q3 average deal size at Series A and B was $24.2M/deal compared to $26.5M/deal for Q2 - not a significant delta.
Similar to at the seed stage what we are observing is similar deal sizing, less funding for fewer companies compared to previous quarters, which in turn has led to valuation compression.
At TheVentureCity we are far more concerned about helping founders build sustainable business models rather than optimizing for highest valuations possible at the early stage.
Before raising their Series A rounds, startups should have their products built in full and management teams organized correctly to execute at scale. As David Smith, our VP in Data and Analytics, emphasizes going into a Series A raise, product-market fit is everything. In this Beams clip he explains: to achieve PMF, founders must prioritize high customer engagement and retention.
As you can tell, we are all about data and the insights that lead to startup strategic business decisions. If you are in the early stages of understanding your customer behavior or moving towards product-market fit, we encourage you to submit your data to our proprietary Growth Scanner. We built this free data platform to help founders understand their customer data better and scale to more profitable unit economics.
Late-Stage comes in for a bumpy landing
As expected, late-stage fundraising (Series C and later) took a hit in Q3 2022. Q3 produced just $17.3B in volume across 190 deals, representing nearly a halving of the market in size compared to Q2 ($34.4B).
Cesi de Quesada Covey, a Partner at TheVentureCity and an experienced operator from her time at Facebook, has a distinguished perspective on how investors approach different markets. She shares here in the below Beams clip how investors are being more judicious, selective, and conscious of business fundamentals and return profiles - applicable for startups at all stages, including later ones.
Ecosystem Member perspective
Daniel Green, a Partner and Lawyer at Gunderson Dettmer LLP is experienced in navigating legal and strategic challenges for startups from their first fundraise to their final exit. He shared his advice for startups, particularly at later stages:
Trends and Sectors of Interest from our Ecosystem...
We began this VC Benchmark report stating that many investors sat on the sidelines this past quarter, and when they did decide to carefully place bets, they did so in areas they were most familiar with, exposing themselves to mitigated risk profiles.
We believe at TheVentureCity that founders and investors alike have to be bold and think differently in order to create real change and value. We want to highlight select founders and investors from our ecosystem who are leading by example and building the future of new sectors.
ClimateTech is an emerging and quickly growing space that we are particularly interested in. The importance of building tech to save our planet is of growing importance, and climate-specific investors are building platforms to solve for this purpose. There’s no better investor that exemplifies this cause than Kiel Berry, Founder and Managing Partner of Mission One Capital. He shares in the below Beams clip his thoughts on ClimateTech and progress we have seen in the industry.
Disruption in Food and Agriculture
An excellent application of precisely what Marta detailed above comes in the form of Harmony Baby Nutrition, which is currently closing a round. Del Afonso describes the trend in how infant nutrition is changing and how Harmony is building a more sustainable, natural solution:
The infant nutrition space is going through a major revolution. For over 150 years, we have been producing baby formulas with the same old technologies, using cow’s milk as the key ingredient. Now, innovations from the biotech industry are coming to the food space and totally transforming the baby nutrition area. Harmony is a food-science based company applying cutting-edge biotechnology in the baby formulas space ($50B+ industry). Cow’s milk/cow’s milk components make up >90% of an infant formula
Since breast milk composition is very different from cow’s milk, nowadays up to 17% of babies on formulas have allergic reactions (>24M Formula allergic babies/year). Harmony bioengineers breast milk and replaces all cow’s milk ingredients in a formula with the real human breast milk components. The first version of its breast milk protein-based formula is 64% bioidentical to breast milk and totally allergen-free and environmentally-friendly.
Q3 2022 proved to be a turbulent quarter for startup and investing activity. Investors and founders alike saw changing tides in markets and adjusted accordingly. For the most part, founders got the short end of the stick - they braced themselves and their companies for difficult roads ahead as investors protected their existing investments and waited patiently for premier opportunities to deploy select amounts of capital.
However, as our ecosystem has proven, there is plenty of reason for optimism. The world will always need bold founders who will build the future, and investors will gladly support the ones who do, especially when they do so in capital efficient and sustainable manners. We believe the current fundraising environment represents a return to normalcy after over exuberancy in 2021.
At TheVentureCity, we maintain a long-term investing view, which means that short-term market fluctuations are less relevant to the success of early stage founders. We know as former founders and builders that markets move in cycles and the best entrepreneurs always prevail. We are excited to support these founders throughout their inspiring journeys.