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2022 recap: second highest year for VC investment, but winter is here

Even though venture capital (VC) investment in 2022 declined from 2021’s record-setting pace, it still surpassed the $200 billion mark.

In brief

  • VC-backed companies raised $32.4 billion in Q4 2022, down 14% from Q3 2022.
  • While a significant amount of dry powder remains on the sidelines, investors will be more patient in deploying capital in the coming quarters. 
  • Entrepreneurs need to reset expectations and retrench so they can survive and position themselves for when the market rebounds.

Venture capital (VC) investment continued to weaken from the record-setting pace of 2021, declining by 14% in Q4 2022, from the $37.9 billion raised in Q3. That said, VC activity still surpassed the $200 billion mark, reaching $209.4 billion, making 2022 the second highest year ever for VC investment.

Record amounts of dry powder are still available on the sidelines, but fund formation has slowed significantly in Q4 2022, dropping to $7.1 billion. This represents a dramatic decline from the first nine months of the year, when venture capitalists raised a record $157.6 billion.¹

The slowing in fund formation is the result of many limited partners finding themselves fully invested for 2022, as they wrestled with the impact of the “denominator effect,” meaning the overall value of their asset base dropped due to the decrease in their public portfolio values throughout 2022. Limited partners found themselves fully or overexposed to venture.

Although dealmaking is on the decline and valuations are trending downward, the existing dry powder will last for some time, offering plenty of capital to fund new innovation. But overall, VCs are being more cautious and taking more time to invest now compared to a year ago. This will likely continue in the first half of 2023. Entrepreneurs who are able to innovate with limited resources and scale efficiently will be able to attract venture capital. Below are four tips to entrepreneurs navigating growth in this challenging market.

Venture capital (VC) investment and the number of deals continued to weaken from the record-setting pace of 2021, approaching the levels of 2020.

Mega-round financing

Mega-round financing continued to tail off significantly, with only 61 deals reported $100 million and above, compared to a peak of 239 in Q4 2021. Mega-round financing has approached pre-pandemic levels of deal volume, and the lack of mega-round financing is a major contributor to the current investment slump and the slower pace of unicorn creation. 

The drop in mega-round financing has contributed to the current investment slump and slower pace of unicorn creation.  

All sectors except for energy saw a decline in 2022 

With the exception of energy, all sectors saw a dramatic decline from 2021. The three sectors that raised the most in 2022 – IT, business and financial services, and health care – all fell by over 35%. Consumer services bore the brunt of this decline, plummeting by 58% as investors avoided making additional commitments to this sector with a potential recession looming. 

The one bright spot remained energy, which raised $12.6 billion in 2022. While this was down quarter over quarter, it was up 17% over 2021. The strong showing in this sector was largely driven by investors and companies responding to the energy crisis as well as the ongoing need to address climate change. 

Several government and regulatory programs are contributing to this surge in interest. The Inflation Reduction Act passed last summer provides a number of incentives for companies that develop clean energy solutions, particularly electronic vehicles. Many organizations are also interested in carbon capture technology as they prepare to comply with the proposed SEC climate disclosure rules. 

In terms of overall ranking, health care raised the most in Q4 and surpassed IT for the second straight quarter. IT experienced the second successive single-digit quarter at $8.7 billion, the first time that has happened since 2018. Health care still came in below 2021 levels, but investment continues for companies that are advancing health care treatments and solutions aimed at an aging population and chronic diseases. The two biggest categories in this sector continue to be biopharma and health care services. 

With the exception of energy, all sectors saw a dramatic decline from 2021 investment levels.

The San Francisco Bay Area continued to be the most active region for VC investment

Even with the drop-off in IT activity, the San Francisco Bay Area continued to rank as the most active region for VC investment in Q4, followed by New York and Boston. Chicago and Orange County emerged as the fourth and fifth most active regions, respectively, pushing past Los Angeles. 

Chicago had five mega-rounds, led by a $500 million deal for a carbon recycling technology company, while Orange County had the largest deal in Q4 for a defense manufacturing company. The VC market in Los Angeles is primarily driven by consumer products and services, which accounts for the falloff in that region.

What does this mean for entrepreneurs?

Don’t expect a turnaround in the immediate future. Until the broader market stabilizes, the outlook for Q1 2023 remains uncertain. The fundraising environment is expected to remain challenging for existing companies. Looking ahead, entrepreneurs should continue hunkering down to extend their capital reserves in a difficult fundraising market.

A few recommendations come to mind:

  1. Scale smartly: For years, the venture capital and startup industry operated under a growth-at-all-costs strategy that may have been acceptable during a period of easy money, but this is no longer viable. Companies need to embrace “smart” scaling: taking incremental steps toward rational growth vs. undisciplined expansion predicated on the belief they will always be able to raise additional capital. For the near future, more organizations will likely move cautiously as they emphasize increasing topline revenue while effectively managing costs.
  2. Focus on finance: At the same time, companies should carefully review operations and use a scalpel rather than a cleaver. Finance is one typically underinvested area in startups. It should not be viewed as a cost center but rather as one that plays a major role in protecting the organization’s overall value. Companies that will want to sell or monetize their business need to have a strong financial tracking system in place that can produce accurate and reliable financial data for investors to review. Those that can’t will have trouble attracting investment or getting acquired at the price they anticipated. 
  3. Assess and innovate: The trifecta of limited capital reserves, waning demand and market headwinds means companies will need to innovate to survive. Reassess the competitive landscape, refine your market positioning, and constantly iterate on your products and services. This may require a product pivot or customer shift or refinement of the product. Be prepared to benefit from opportunities where competitors burned too brightly and too fast.  All options should be on the table.  
  4. Continue investing in your team: Don’t lose sight of the importance of recruiting and maintaining a strong team. Some great people could become available as companies reassess and shift their areas of focus. A key addition to your team could make a big difference.

Overall outlook

While the decline in VC investment was stark in 2022, this is not all doom and gloom. We are coming out of a period of unprecedented activity and growth. VC-backed companies still raised more than $200 billion during a volatile market characterized by inflationary pressures, an unstable geopolitical landscape, rising interest rates and recessionary fears.

The industry is going through a course correction. To borrow a skiing metaphor, many companies got “too far over their skis” throughout 2020 and 2021. They grew too rapidly, adding staff and expanding into business ventures that failed to deliver tangible and timely results.

Investors and entrepreneurs now remember just how hard it is to start, build and finance a new enterprise. Driving sustainable success takes time and hard work, and startups need to play the long game. The market will rebound, but it won’t happen overnight. Entrepreneurs need to develop a sound value proposition, with a viable path to profitability and long-term plan for growth. Organizations that are able to do this will survive and even thrive in 2023 and build a successful foundation for the future.  

It is, however, a great time to start a new company. Many brand-name companies were started during recessions and downturns. In these times, investors are looking for opportunities when valuations are lower, expectations are more rational, and companies are grittier and more tenacious. Capital is harder to come by, and entrepreneurs realize that and act accordingly.

In five years, we will likely look back and point to several great companies that got their start this year.

Source: Unless otherwise noted, statistics are from Crunchbase as of January 3, 2023, Ernst & Young LLP.


The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization. Numbers included are from EY analysis and based on Crunchbase data unless noted otherwise.

*We include equity financings into VC-backed companies headquartered in the US. Sources of cash investments include, but are not limited to, VC firms, corporate investors, other private equity firms and individuals.


While VC activity declined from 2021, all is not doom and gloom. VC-backed companies still raised more than $200 billion in a volatile market. In addition, significant amounts of dry powder remain available to fund innovation by companies that can plot a path forward during a down market.

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