Slow Q1 reflects current reality

Venture capital fundraising, deal volume and deal count are all down in health tech, but a PitchBook report indicates signs are not all bleak.

Why it matters: The market’s lack of current confidence is obvious, but investors can see where opportunities lie.

Details: VC activity dropped in all stages and sectors in the first quarter of 2023, per the report.

• The steep decline in the proportion of angel and seed rounds relative to other rounds of investment stands out.
• Angel and seed activity usually hovers around 47% but declined to 34% of all deals made in Q1. This follows a low, but not unprecedented, 38.4% in Q4 2022.

Context: An early-stage health tech investor said that it comes down to the fact that no investor wants to feel they are overpaying for a company or taking on undue risk at an inopportune time.

• "In addition, many of the strongest private companies are well capitalized and/or completing insider rounds to bridge to their next fundable milestone," Yaniv Sadka, investment associate at aMoon Fund says.
• "Thus, many investors are awaiting those blue-chip companies to return to private capital markets in late 2023 and 2024," Sadka says.

Meanwhile, 2023’s fundraising has been abysmal, as $11.7 billion was raised in Q1.

• "This quarterly and year-on-year decline is steep enough that it is hard to contextualize. Whether the trend will continue, or soon reverse, remains unknown," per the report.

Yes, but: Opportunities do exist.

• "More realistic valuations, combined with a market awash in talent and new government programs designed to assist company formation in high-growth strategic industries, are all positive signs," the report authors wrote.

By the numbers: Late-stage deal value plummeted in Q1, declining for the seventh straight quarter to $11.6 billion.

• "As investors grapple with a liquidity crunch due to a frozen exit environment, they have shied away from larger deals in an effort to preserve capital."
• Just 19 late-stage mega-rounds occurred in the first quarter of 2023, compared with 98 in Q1 2022.

What's happening: "Many growth investors are still reeling from write-downs on many investments in 2022 and 2023, and now need to answer to their LPs," says Sadka.

Of note: Not only has this widened the funding gap between startups seeking capital and investors willing to provide it, but it has also put downward pressure on deal pricing.

• In Q1 2023, the median late-stage VC pre-money valuation fell 16.9% from the 2022 full-year figure to $54.0 million.
• While the average pre-money valuation declined by more than $120 million to $159.1 million during the same period.

What they're saying: "Startups looking to exit through M&A are getting strong initial receptivity. But these companies bear the burden of proving why they are looking to exit at this time, given the challenging market backdrop," per the report.

• One VC investor says that with this macroeconomic backdrop, "what drives investor interest are companies that are solving hard problems in unique and innovative ways."
• "Historically, times like these have been excellent for founders and investors alike," says Ambar Bhattacharyya, managing director at Maverick Ventures.
• Sadka says R&D and commercial time horizons are years long, and investors understand that VC investments are illiquid.