PitchBook News - The state of startup funding

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The Weekend Pitch

August 28, 2022

Presented by Masterworks

(Jonathan Kitchen/Getty Images)

Several months after just about every venture firm told their portfolio companies to prepare for a funding drought, some investors are saying the health of the startup ecosystem may not be as dire as it once seemed.

"Deals where we would consider leading a Series C or D—that was dead six months ago. That's starting to pick up again," said Mitchell Green, founding partner of growth equity firm Lead Edge.

Investors are expressing renewed, albeit cautious, optimism thanks to strength in some tech earnings, particularly of cloud companies, which has helped stabilize public markets recently. Other positive factors include a sense that inflation may have peaked, receding fears of a deep recession and VC's record levels of dry powder.

"There's a feeling that stocks hit bottom in June," said Greg Martin, managing director at Rainmaker Securities, a brokerage specializing in sales of stakes in late-stage technology companies. After many months of tepid secondaries activity, trading has jump-started over the last two weeks.

I'm Marina Temkin, and this is The Weekend Pitch. You can reach me at marina.temkin@pitchbook.com or on Twitter @mtemkin.

The markets' decline on Friday after Federal Reserve chairman Jerome Powell's comments about the central bank's war on inflation shows investors remain uncertain about the direction of the economy and highlights the fragility of the current rebound in dealmaking.

But in the meantime, startups are gradually accepting that valuations have declined from their 2021 highs.

Quote/Unquote

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"As large public PE firms have expanded, they've commanded a greater proportion of LP assets, making fundraising more difficult for small GPs. This could be causing some GPs to consider selling. And as in many industries, size often means higher profit margins."

—PitchBook analyst James Ulan, on the possibility that publicly traded US PE firms could focus on acquiring stakes in competitors, as they look for ways to grow and sustain their stock prices.

Deal flow

(William Potter/Shutterstock)

In the first half of 2022, global private market fundraising totaled $639 billion, a level similar to 2019's record—an impressive feat considering the lingering effects of the pandemic and numerous other economic headwinds.

In 2018 and 2019, private equity accounted for more than 40% of the global total, but this year the figure dropped to 36% in H1, with another strategy rapidly picking up the pace, according to our latest Global Private Markets Fundraising Report.

Did you know ...

(Yellowj/Shutterstock)

… That so far this year, add-ons have made up their largest proportion—more than 67%—of European buyout transactions since at least 2007?

Overall, buyout activity is down from last year, but add-ons have been a key part of PE investors' approach, as firms seek to scale their portfolio companies amid the downturn.

Datapoints

(Eightshot_Studio/Shutterstock)

Tech stock sell-offs and public market volatility have made venture capital an increasingly attractive asset class for nontraditional investors, and in the first six months of the year, the size of VC rounds including these backers surged.

Median early- and late-stage deal sizes with nontraditional investor participation rose 42% and 38%, respectively, in H1 2022, compared to 2021's full-year figures.

Recommended reads

Are sanctions on Russia working? The lessons from a new era of economic warfare. [The Economist]

DraftKings is coming for your money at Wrigley Field. [Bloomberg]

An analysis of 157 crypto exchanges shows that more than half of all bitcoin trades are fake. [Forbes]

Why the act of whistleblowing on the tech industry has become tainted. [The Atlantic]

How alt-asset manager Brookfield avoided slamming into a brick-and-mortar wall—with a little help from its frenemies. [Institutional Investor]

An unexpected deal may save $1.3 trillion of US-listed Chinese stocks from a mass Wall Street delisting. [Fortune]

This edition of The Weekend Pitch was written by Marina Temkin and Ryan Prete. It was edited by Chris Noble and Kate Rainey.

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PitchBook News - The state of startup funding

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