RALEIGH – Three factors led to a decline in the venture capital industry in the fourth quarter of 2022, according to a new report on the sector released by PitchBook and the National Venture Capital Association today.

The ongoing, lingering COVID-19 pandemic and its impacts continued to affect the venture capital sector, as did the ongoing geopolitical conflicts occurring abroad, according to the report.

But across the country, the increasing cost of borrowing and rising interest rates throughout 2022 played a role in slowing the economy, especially for large, growth-stage technology companies.

While in 2021 and the first half of 2022, “thee ample credit and uncertainty that characterized the peak of the pandemic represented a brief but fruitful period for the VC industry,” the executive summary of the report reads.

And while deal count and invested dollar amounts surpassed prior highs, there was also a period of experimentation of new business models across sectors, the summary notes.

So, overall, in raw numbers across the entire year, 2022 can be seen as a “great year for the VC industry, with most indicators of market activity at or near record highs,” the report notes.

But there remains a lingering question, as the latest data shows a decline in the fourth quarter: Is the party over, or is the sector just taking time to reorient in a changing economy?

Venture funding falls but investing remains strong in Triangle for ’23, funders say

A ‘continued slide’ to come?

According to the PitchBook data set, venture capital deals dropped in the fourth quarter to the lowest total since prior to the onset of the COVID-19 pandemic.  And deal activity has decreased in four consecutive quarters nationally, the report notes.

That could “foreshadow a continued slide in 2023,” the report concludes.

Late stage deals plummeted in the fourth quarter, as well, moving toward a four year low, according to the PitchBook data.  And the earliest stage companies, those seeking seed funding or angel investment, also saw deal flow slump in the fourth quarter.

Still, another report released by CB Insights earlier in the week found that in the Raleigh area, mid-stage companies saw an increasing share of deal activity.

PitchBook data. Chart by WRAL TechWire.

North Carolina deal flow, capital investment

PitchBook data shows that across North Carolina, venture capital activity spiked in 2021 and for much of 2022.  And with an increase in deals came an increase in investment, as well.

But in the fourth quarter, there were 55 deals in North Carolina, the fewest number of deals made since the third quarter of 2020 at the height of uncertainty due to the COVID-19 pandemic.

And while those deals saw $294 million pour into North Carolina’s startups, according to the PitchBook data set, the total invested dollars plummeted in the fourth quarter compared to the prior two years of data.

PitchBook data. Chart by WRAL TechWire.

What happens next

One thing remains: Even as it may have been more challenging to raise capital in the fourth quarter of 2022, there’s still venture capital available to North Carolina’s startups.

That’s especially the case as multiple investors told WRAL TechWire this week that they anticipate a busy 2023, as valuations are likely to have decreased relative to 2022 or 2021 peaks, and companies that have successfully shored up their balance sheets and their operations may be well equipped to take on new investment at terms that appeal to investors.

And the funding environment also “shouldn’t deter founders from starting companies,” said Karen LeVert, a venture partner at Pappas Capital.  “If your company fills a big need that can make money for investors, there will be interest.”

Tthe very best companies are still performing well, so will still attract investors, said Kevin Mosley of Jurassic Capital.  “There’s still a surplus of dry powder with investors that has to go somewhere,” Mosley noted.

Jurassic Capital filed an amended securities disclosure this week, which shows that the fund has added an additional $7.85 million to its fund that is targeting growth investments, which the company confirmed to WRAL TechWire.

“As Growth Equity investors, we invest heavily in a smaller number of companies,” Mosley told WRAL TechWire.  “We tend to invest in relatively capital efficient businesses up front, so our investment thesis and portfolio company playbook hasn’t changed much even in the down market.”

And, like Jurassic Capital, other venture capital firms were successful in raising funds in 2021 and in 2022 and will be looking to make deals in 2023.

That includes Pappas Capital, said LeVert, noting that the firm plans to “be making more investments due to an initial close of the latest fund.”

“2023 will likely prove to be a better fundraising year due to having less unknowns around the economy,” said LeVert.