The ratio of venture capital deals to exits reaches “unsustainable” levels

It’s been an unfortunate year so far for venture capital outflows. To put the slowdown into perspective, the U.S. venture capital industry closed about 15 funding deals for every exit in the third quarter of 2022, according to the latest edition of the PitchBook – NVCA Venture Monitor.

“The deal-to-out ratio of around 15 to 1 is not sustainable,” said Kyle Stanford, principal analyst at PitchBook. “At around 50% higher than the figure for previous years, we have to assume a higher investment failure rate than what we have seen in the past.”

Although the IPO market has been non-existent this year, acquisitions have always been a common exit route for venture-backed companies. But Stanford said that while M&A activity has also slowed, the number of closed exits per acquisition in 2022 is higher than any year before 2021. This shows that the increase in the deal- release has a lot to do with the high number of tours going on in this market.

Venture capital-backed companies raised nearly $195 billion in the third quarter, marking the second-highest annual total of capital investment after 2021. On the outflow front, just $63.4 billion in output value were generated out of approximately 1,092 output events.

Lack of liquidity via public markets is likely to put additional pressure on late-stage startups to return to stock markets for additional funding and accept investments at lower valuations compared to previous cycles.

“There has been an enormous amount of value created in recent years with rising valuations, but if that value cannot be realized, then the venture capital market will likely suffer,” Stanford said.

Featured image by Catherine McQueen/Getty Images

This article originally appeared on PitchBook News

Sallie R. Loera