Annual State of the Venture Market Overview by Asaf Horesh

Navigating the VC Landscape Overview

🔷 2020’s COVID-driven tech boom across various sectors (remote work through education to food delivery) and printing money brought 2021’s endless supply of capital, mostly from “tourist” investors in growth stages, which drove companies to raise more than they needed and focus on the wrong KPI (e.g. # of hires). Followed by 2022’s downturn that started in the public market at the end of 2021 and only hit the private VC market in mid-2022. We are only 18 months into the cleanup of the system… And this is what a cycle looks like.

🔷 Despite public market trends, 2022, not 2021, marked the peak for capital raised by VC funds in the U.S. and Israel. Most of it was raised in the first half of 2022 by managers who anticipated the end of the cycle and acted quickly. Yet, 2023 brought a funding dip, and not every fund was able to fundraise, reminiscent of 2016-2017.

Stabilization on the Horizon?

🔷 Quarterly trends hint at early stabilization in VC and startup investments in the US, Europe, and Israel. After a period of decline, we see signs of market stabilization, with funding levels at a pre-2020 pace. Watching with cautious optimism.

Comparing Eras: Dot-com and Now

🔷 Drawing parallels with the dot-com era (1996-2003), our current trajectory (2016-2023) shows similar patterns. Like in the dot-com, we’ve risen to a peak followed by 2 years of similar decline. Extrapolating from dot-com and considering the stabilization in prior slides, we are likely at or near the bottom. Which is basically the new/old normal.

One can learn that disciplined investors deployed slowly not only during 2020-2021, but also during 2022-2023.

Unicorns and Valuations Deep Dive – Rethinking Unicorns

🔷 The era of easy unicorn status is over. The dramatic ~90% slowdown in mega-rounds in the U.S., Europe, and Israel has made tech unicorns into actual unicorns… mythical!

‘Trickle Down Economics’ in VC

🔷 Growth stage investing, which was driving the surge in the market since the second half of 2020 (partially by “tourist investors”) and pulling the mid and early-stage investments, has been the first to be impacted by the correction => ‘Trickle Down Economics’ at play across the U.S., Europe, and Israel.
Valuation Trends Across Stages

🔷 After a 2021 spike, late and venture-growth stage valuations that are the closest to the public markets began their descent in 2022, accelerating into 2023. We’re now seeing this trend “trickling down” into the earlier stages, with a similar effect in the E.U. and Israel as well.

🔷 Growth and late-stage investing were in charge of most growth in 2021, and also in charge of the decline in 2022. In 2023, we’ve seen the entire funding stack adjusting. When looking at per-stage funding, we can see the stabilization trend already in play at the mid and late-stage (Series B and above). However, we still don’t see this trend at the early stage. Q4 might have been the first one to show some stabilization in Series A.

🔷 What’s even more interesting is the gap in the early stage that has opened in the last couple of years. While most investors kept investing at Seed – all the Seed funds emerging in 2021 coupled with the multistage funds that were “pressed” to do so by the “tourists,” it has been much more challenging to raise a Series A. Traditionally 2.5x capital has been invested in Series A over Seed in the U.S., it has been less than 2x in the past couple of years.

As the market adjusts, the focus shifts to how these changes will influence exit strategies, IPOs, and M&As.

The Exit Landscape: M&As & IPOs

As we conclude our venture market series, the spotlight turns to exits, where IPOs and M&As paint a complex picture of the current ecosystem.

🔷 In the U.S., the once bustling IPO market has cooled significantly, with a more than 90% drop in the total value of VC-backed IPOs in 2022 and 2023. Despite notable IPOs like @Klaviyo & @Instacart, the market window stays shut, with both trading below their IPO prices.

🔷 M&A activity, while also experiencing a downturn, reveals a nuanced story. In the U.S. and Europe, the average deal values have declined signifiacntly, reflecting a cautious approach amidst market uncertainties. However, Israel on the other side of the spectrum saw a surge in M&A activity, the key driver being cyber consolidation and Israel’s successful Cyber ventures (~70% of all M&A activity in IL).

Market Realignment

🔷 This period of adjustment suggests a realignment of expectations, with a potential rebound on the horizon. Strategic acquirers and financial sponsors, have significant capital for acquisition (significantly more than past downturns), but haven’t been executing private deals while sponsors shifting towards take-privates, ie. buying public and not private companies

Forward Outlook

🔷 As private market valuations begin to align more closely with public market realities, we anticipate a resurgence in exit activities. This realignment, coupled with well-capitalized buyers, sets the stage for a shift in the M&A market.

What’s Next?

🔷 The evolving dynamics of IPOs and M&As offer both challenges and opportunities. As we move forward, the venture market’s resilience and adaptability will be key to unlocking new growth avenues.