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Q4 trends in venture capital

Near-term challenges and long-term opportunities: What founders need to know going into 2023.

Expectations signal a difficult macro environment for the U.S. in 2023. Yet while venture markets are likely to be challenged in the near term, long-term opportunities remain. Here's a look at the economic factors shaping our outlook, what actions founders can take to navigate the challenging capital raising landscape and what J.P. Morgan is thinking about a potential turn in the exit environment from my article in the PitchBook-NVCA Venture Monitor Q4 report.


Uncertainty clouds VC landscape

The next six months will be telling in terms of how VCs triage their portfolios amid reduced growth forecasts and elevated uncertainty. They'll likely remain selective in using reserves to support existing investments, which could lead to a pickup in strategic M&A and/or other partnerships solely for the purpose of pooling liquidity resources. 

Many companies that raised during the heady days of 2021 will be needing additional capital in the coming quarters. Valuations are likely to be down regardless, so founders shouldn't wait for conditions to improve if an opportunity to raise capital is available sooner. We expect a crowded field by late spring, early summer.

This comes as founders face ongoing needs to dial back cash burn and extend the runway wherever possible. This is especially true in Series B or later, where the gap between valuations at the last raise and current market realities is the largest.


Eyes on the Fed, consumers and jobs

Public markets can be a bellwether for private markets, and given the deteriorating fundamentals and tight financial conditions, we expect elevated volatility and lower valuations for equities in the first half of the year.

A sell-off combined with disinflation, rising unemployment and declining corporate sentiment could be enough for the Federal Reserve to start signaling a pivot. This would likely drive an asset recovery and push equities higher into the second half of the year.

U.S. consumers appear to be entering the new year on relatively solid financial footing despite stiff inflation for much of the year. While we aren’t seeing widespread signals of financial strain as delinquencies hover near historic lows, it’s possible that consumer spending could slow in 2023 if labor markets soften.

Speaking of, while the tech sector and some areas of housing and mortgages have started to announce workforce reductions, labor market conditions across the U.S. economy have remained strong. Eventually, we do expect the effects of higher interest rates and a slowing economy to cause some loosening in labor market conditions by the second half of the year. 


Private capital markets resilient despite IPO slowdown

Private capital markets have been a critical source of funding for later-stage private companies as IPO markets stall, thanks largely to greater deal flexibility.

J.P. Morgan’s new digital platform, Capital Connect, can help entrepreneurs connect with other founders and VCs, analyze market trends and raise capital. It also includes a robust database of recent transactions to help founders evaluate the market environment and benchmark deal terms.  

History tells us we could still be several quarters away from a broad reopening in the IPO market, underscoring the valuable role of private capital markets. However, some factors that could precipitate an IPO comeback include less volatility, greater multiple stability, increased confidence on growth and margin outlooks, and improved trading performance from recent IPOs. 


Preparing for a turn in the exit environment

Even if a pick-up in the exit environment is months away, founders can start planning now. Here are some best practices to consider:

  • Stress-test the business model and forecasting ability across a range of economic scenarios over the outward quarters and years. Investors are increasingly focused on how a business may fare through an economic cycle and a path to profitability.
  • It is important to analyze both the balance sheet needs of your business as well as insider or employee monetization needs. 
  • Founders should continuously be fostering relationships across venture capital, PE, sovereign wealth funds and family offices. It is critical to have a robust relationship network on which to capitalize for a primary capital raise or to help facilitate secondary sales.


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