When Can We Expect Venture Performance to Bounce Back?

Early-stage venture performance on AngelList has been historically depressed since summer 2022, with the share of marked-up deals dropping from 78% to 63% in 3Q22, before ending the year at 67%.

The decline in performance was largely expected given the broader market turmoil. Now investors wonder if we’re primed for a recovery, especially given the stock market’s rebound in early 2023.

Our previous research has found there’s no immediate correlation between the public market and the private markets. To re-confirm this finding, we created a simple index of every seed-stage investment on the AngelList platform that is 1+ years old and looked at its changes in value against the tech-heavy Nasdaq index. The result was essentially zero correlation (r = -0.02).

This lack of correlation explains why, when the public markets started to fall at the beginning of 2022, early-stage VC performance held up for a time before tumbling around mid-year 2022. Prior research suggests private equity lags the public markets by 9-12 months. Our monthly data on early-stage venture capital suggests this lag probably extends even longer for VC—all the way to 18 months (6 quarters) out:

In isolation, given the number of months of data, statistical significance at the 5% level typically used in social science research can be found at a correlation coefficient of about 0.2. Here, we’re looking at many months of lag (instead of a single month, in isolation) which would raise the bar for significance, but we’re also observing a larger trend: between 9 and 18 months of lag, all but one correlation coefficient is positive. As a result, we believe we have found evidence of a modest positive relationship between lagged public markets and the venture market, and that lag is felt around 9 to 18 months.

Given most startups raise new rounds of financing at least every two years or so, our data suggests startups need to go through a round of financing to absorb whatever changes have happened in the public markets.

The Nasdaq dropped significantly in the first half of 2022, followed by a choppy recovery. Meanwhile, the most recent three-month block of AngelList data (December - February) indicates a continued slump in the venture markets, with a positive activity rate of just 64%.

Our results suggest that no matter how well (or poorly) the Nasdaq does this year, the effects likely won’t be seen in the venture markets until next year. That means the tenor and frequency of follow-on venture financings won’t return to their historical, pre-pandemic levels until at least 2024.

The recent collapse of Silicon Valley Bank (SVB) is a useful corollary for our lagged correlation hypothesis. There has been speculation that one reason SVB failed to find an acquirer is the potential for losses in its venture debt portfolio. This analysis resonates with what we’re proposing: the startup fundraising market still needs more time to fully digest changes in the public markets.

As discussed in our most recent State of Venture report, fewer venture deals are getting done than we’d expect and those deals have included more markdowns than is typical. Our findings suggest these trends will persist throughout 2023, as public market upheaval from the first half of 2022 works its way through follow-on financings in the startup ecosystem.

For more data on early-stage VC, check out our Real-Time Startup Valuation Dashboard or read our latest quarterly State of Venture report.