Link to original article: 2023 US Venture Capital Outlook

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2023 outlooks

p. 2 The Morningstar PitchBook US Unicorn Index will show a negative return from
January 1, 2023 through December 31, 2023.
p. 4 Series C and D rounds will see the most down rounds, as these companies are
currently the most starved for capital.
p. 6 Seed-stage startup valuations and deal sizes will continue their ascent, reaching
new annual highs despite a slowdown in total deal value and count.
p. 8 SPAC IPOs and mergers will continue to decline while liquidations will continue
to increase in 2023.
p. 10 Venture growth deal value will fall below $50 billion in the US.
p. 12 2023 US VC mega-round activity will fall below 400 deals, hitting a three-year low.
p. 14 US VC fundraising will fall between $120 billion and $130 billion in 2023.

Outlook: The Morningstar PitchBook US Unicorn Index
will show a negative return from January 1, 2023
through December 31, 2023.

Rationale: As of December 1, 2022, the US Unicorn Index has returned 1.0%
YTD, while our VC-Backed IPO Index is down 59.1%. This difference is due to
several factors, not the least of which being that nearly 200 unicorns have been
created in the US this year. However, the pace of new unicorn creation, and the
pace of unicorn rounds in general, has fallen precipitously in recent months. In
November, fewer than 10 completed rounds resulted in a post-money valuation
of $1.0 billion or more, well below the 48 completed in January, which saw the
year’s monthly high. With few new unicorn rounds maintaining the recency
bias toward private values, public comparables will impact unicorn pricing
more, putting downward pressure on the index as the public market remains
depressed.

Risks: While it continues to look less likely, a public market turnaround would
push the Unicorn Index into positive territory. Not only would increasing public
comparable prices put upward pressure on private values, but new unicorns
and new financings for current unicorns would also continue to have a positive
impact on the index as they have in 2022 and 2021.

The Morningstar PitchBook US Unicorn Indexes, which debuted in November,
provide insight into the opaque pricing of unicorns, companies with a post-money
valuation of $1.0 billion or more. The indexes are calculated daily using the most
recent private valuations and changes in public and private comparable companies.
Arguably the most important piece of the pricing model is the most recent valuation
of a company, pinning the value of a unicorn to its price upon completion of the
round. The further away from that round the company gets (there is a roughly
18-month span between unicorn rounds), public and private comparable companies
increasingly impact the company’s valuation.

When we look at the 2022 US index return of 1.0%, the large number of unicorn
rounds throughout the year has tied many index constituents to their most recent
priced round, most of which were at a valuation step-up. At the same time, we
have not yet seen a marked increase in private company down rounds during the
economic slowdown. In 2022, the median step-up for late-stage valuations has been
2.1x—higher than the median step-up in 2021. However, this figure has decreased
rather quickly throughout the year. The median late-stage step-up in Q3 2022 was
just 1.8x, indicating that private valuation growth, which would underpin unicorn
valuations, is growing at a much slower rate. We expect this trend to continue
in 2023 so long as the public market is less receptive to high-growth, high-loss
companies, as many unicorns are likely to be seen.

The US Unicorn Index has returned much higher than what was seen in the broader
public market or in our VC-Backed IPO Index. However, in November just nine deals
were completed for a post-money valuation of $1.0 billion or more. We believe
this trend will continue, potentially falling even further as the pressure created by
stagnating value in the private market constrains activity. We also believe that down
rounds and further slowing of valuation growth are likely to be trends in US venture
in 2023. These factors will increase the public market’s effect on the index’s pricing.