The third quarter of 2022 concluded with FUD (fear, uncertainty, & doubt) in the market’s driver seat as the cost of borrowing soared to levels we’ve not seen in over a decade (30-Year prime mortgage rate touching an over 2-decade high near 7%). The Fed’s game of monetary catch-up – chasing down 4-decade high inflation through unprecedented rate spiking measures – continues to fuel the now-inverted interest rate rocketship at the heart of recent market volatility.
Low-liquidity-induced volatility in the shorter-duration public markets (stocks & bonds) has equated to an incredibly quiet venture capital space over this summer quarter. Many early-stage investors were able to sit back and watch the chaos on the public exchanges at an arm’s length, with VCs’ 7 to 10-year vesting timeline providing savvy VCs (who didn’t overcapitalize later-stage ventures in 2021) with plenty of time to assess investment opportunities. Venture capitalists have the luxury of looking past near-term macroeconomic pressures and toward the value-juiced innovations that Industry 4.0 has to offer.
Venture investing activity fell to a 9-quarter low in Q3, while record year-to-date fundraising ($150.6B in net capital inflows in the first 9 months of 2021), left this group of early-stage investors with a record $300B in dry powder (aka deployable capital). Despite the recent VC deceleration, 2022 remains on track to be the second-most active year for early innovation investing on record (second only to 2021).
Building tech startups saw a -29% year-over-year (YoY) decline in quarterly inflows and experienced a -21% investment drawdown quarter-over-quarter (QoQ). The material slowdown in AEC venture investments is a result of smaller check sizes as private investors’ scope shifts toward the longest-duration venture opportunities – having the most significant projected cash-flows years in the future.