Key Takeaways
The innovation economy has slowed down. Investment has fallen from recent highs, valuations are rebasing and exit markets remain mostly closed. Companies have reacted to these changes by reducing net burn. However, historical data shows that the number of unicorns founded during and after recessions increases.
$300B
US VC dry powder hit a new high in 2022. However, if the economy continues to tip down in 2023, we can expect delayed deployments.
$237B
US VC investment in 2022 was down 31% from the record high in 2021 but still the second highest year ever.
37%
US VC-backed tech companies reduced net burn YoY in Q4 as they sought to extend runway, improve efficiency and reach profitability.
The net burn rollercoaster
Over the past decade, the innovation economy has shifted from capital abundance to capital scarcity. Companies have reacted by cutting spending to focus on extending cash runway.
Thirty-seven percent of pre-profit US tech companies reduced net burn. While cutting spending can be painful, it can also lead to better efficiency, higher profitability and improved operating metrics for a potential exit.
Source: PBproprietary data and PBanalysis.
Source: PBproprietary data, PitchBook and PBanalysis.
Multiple expansion subsides
A decrease in capital investment, falling revenue multiples for 2021’s tech IPOs and lower revenue growth rates for US VC-backed companies have led to a decline in revenue multiples of private companies.
In 2022, the median late-stage tech pre-money valuation fell 56%. Companies raising an up round in a tight VC investment market must grow into their new valuation by focusing on product-market fit and building durable, efficient business models.
Liquidity reigns supreme
The median cash runway for companies has fallen from 16 months in Q4 2021 to just over 12 months as of Q4 2022, roughly shy of the median length of a recession. However, many VCs are recommending 18-24 months of runway to weather the storm.
Activity is expected to pick up as VCs may be more apt to invest in companies willing to accept lower valuations in exchange for extended runway.
Source: National Bureau of Economic Research, PBproprietary data and PBanalysis.
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