Welcome to Wing’s sixth annual V21 study!
The mission of the V21 study is to examine early-stage financing dynamics amongst the industry’s highest quality startups. We analyze and report on the trends and characteristics of companies invested in by at least one of the 21 elite venture capital firms, the “V21." This year, the curated V21 dataset captures the details of 10,382 financings at 5,052 companies invested in by V21 venture capital firms at Seed, Series A, and Series B stages across 13 years.
Last year, we were astounded with the Cannonball Effect. V21 companies reached all-time highs in Series A and Series B financing sizes, pre-money valuations, and associated year-over-year growth rates. 2021 was the year of the Cannonball Effect, which had followed the Bull Recovery in 2020 from the onset of pandemic.
2022 was the year of caution. How much of a reset are we in? Could it be a soft-ish landing, to borrow a term from macroeconomics? Is it a return back to normal and away from exuberance? This year’s V21 results show the market turn. V21 firms’ deal volume decreased materially from the unprecedented levels in 2020 and 2021. The Cannonball Effect financings fell off of the proverbial cliff. Series A and Series B financing sizes and pre-money valuations experienced significant declines from 1Q22 to 2Q22 and 3Q22, but then returned partially in 4Q22.
Our key findings are:
V21 firms’ deal volume declined substantially over the past four quarters. V21 firms invested in 98 first-time Seed, Series A, and Series B financings in 4Q22, representing a 53% decline from 208 at the start of the year in 1Q22.
The Cannonball Effect is pulling back. The Cannonball Effect cohort of 10 investment firms invested in 8 first-time Seed, Series A, and Series B financings in 4Q22, representing a 65% decline from 23 in 1Q22.
Generative AI is a hockey-stick growth sector within V21 firms’ deal volume. 11% of V21 firms’ first-time Seed, Series A, and Series B financings were in generative AI in 1Q23, as compared to 7% in 4Q22 and just 2% in 3Q22.
Financing sizes and pre-money valuations for Series A’s and Series B’s decreased from 1Q22 to 2Q22 and 3Q22, with a partial return in 4Q22 as V21 firms may have focused on fewer but higher quality deals.
$20M+ Series A’s are now the norm, and $30M+ Series A’s are the growth area. $20M+ Series A’s represented 52% of all Series A’s in 2022, up from 43% in 2021 and 4% in 2010. $30M+ Series A’s represented 19% of all Series A’s in 2022, up from 15% in 2021 and 2% in 2010.
V21 firms’ deal volume decrease substantially
Avid readers of the V21 study may recall that we do not analyze trends in deal volume from the V21 dataset. The dataset includes a company’s longitudinal deal history once the company is invested in at the Seed, Series A, or Series B stages by at least one of the 21 venture capital firms. An investment by a V21 firm in a single financing will trigger that company’s entire financing history into the dataset. This add-in phenomenon means that deal volumes in the V21 dataset are continuously shifting over time.
In the current tech cycle, it is instructive to examine deal volume. So, for this chart, as well as two other charts below, we analyze and report on V21 firms’ deal volume: the number of first-time Seed, Series A, and Series B financings by V21 firms. Instead of examining V21 companies’ metrics, we are examining V21 firms’ metrics.
There has been a substantial decrease in V21 firms’ deal volume over the past four quarters. The number of Seed deals decreased to 56 in 4Q22 and 42 in 1Q23 from a peak of 95 in 1Q22. The number of Series A deals decreased to 30 in 4Q22 and 32 in 1Q23 from a peak of 91 in 2Q21. And, the number of Series B deals decreased to 12 in 4Q22 and 7 in 1Q23 from a peak of 34 in 2Q21.
Generative AI's hockey stick growth
In this chart, we continue the V21 firms’ deal volume analysis.
At Wing, we invest in companies that enable the AI-First transformation of business. We see ample opportunities for companies that are developing key elements of the AI-First technology stack, or that are applying the stack to terraform major industries.
Generative AI is an emerging field in the V21 firms’ deal volume, and since 3Q22 the growth has looked like a hockey stick. The percentage of overall deals in generative AI has increased from 2.3% in 3Q22 (3 of 131 deals) to 7.1% in 4Q22 (7 of 98) and to 11.1% in 1Q23 (9 of 81). It’s not altogether clear whether this is due to a change in the way companies describe themselves given the new buzzword, or to a change in the underlying technology on which companies are being built, or to both to some degree. In any case, the generative AI deal volume evidences the substantial general interest in the field.
Cannonball effect in retreat
We now return to core V21 dataset analysis.
In 2021, we published our study on the Cannonball Effect, in which non-traditional venture investors from the public and private equity markets invest in early-stage venture capital and have an outsized impact on financing dynamics.
The Cannonball Effect is now pulling back, and the drop is remarkable on a quarterly basis. The Cannonball Effect cohort of 10 investment firms had 8 first-time Seed’s, A’s, and B’s in 4Q22, representing a 71% decrease from the peak of 28 in 3Q21. The cohort had no first-time Seed’s in 4Q22, as compared to 2 in 1Q22. The cohort had 3 first-time Series A’s in 4Q22, as compared to 9 in 1Q22. And, the cohort had 5 first-time Series B’s in 4Q22, as compared to 12 in 1Q22.
While we do not believe that the Cannonball Effect has gone away, we view its availability as a financing alternative for founders to be fundamentally different than a year ago.
Financing sizes continue to increase
The size of early-stage financings continued to increase for Seed’s, Series A’s, and Series B’s for 2022 in total. However, the quarterly dynamics showed a marked decrease for Series A’s and Series B’s in 2Q22/3Q22, followed by a partial return in 4Q22.
The median Seed financing was $6.0M in 2022, up 45% on a year-over-year basis. The median Series A financing was $20.0M in 2022, up 18% on a year-over-year basis. And, the median Series B financing was $45.0M in 2022, up 12% on a year-over-year basis.
The higher Seed financing growth rate drove a decrease in the Seed-to-A multiple to 3.3x in 2022, as compared to 4.1x in 2021. The A-to-B multiple remained relatively flat at 2.3x in 2022, as compared to 2.4x in 2021.
The “cross-class” comparisons continue to show that Seed is the new A and A is the new B. The median 2022 Series A financing is now 82% higher than the median 2010 Series B financing. The median 2022 Seed financing is now 28% higher than the median 2010 Series A financing.
While the annual data reflected overall growth, the quarterly data revealed the effects of the market downturn. The median Series A financing decreased by 14% from $20.0M in 1Q22 to $17.3M in 3Q22, and the median Series B financing decreased by 20% from $50.0M in 1Q22 to $40.0M in 3Q22. The fourth quarter of 2022 showed a partial return for Series A and Series B financing sizes. The median Series A financing increased to $18.1M in 4Q22, and the median Series B financing increased to $45.0M in 4Q22.
The quarterly data for pre-money valuations, discussed below, demonstrated a similar decrease in 2Q22/3Q22 and partial return in 4Q22. In our view, the partial return in 4Q22 may be due to a focus on fewer but higher quality deals among V21 firms. Other companies metrics, also discussed below, such as cumulative capital raised prior to a round, years since founding, and percentage generating revenues, showed a slight uptick from 3Q22 to 4Q22.
The revised jumbo series A become the norm
Three years ago, we introduced the “Jumbo Series A”, which we defined as Series A financings of $20 million or greater. Series A financings of that size used to be rare–but are now the norm! More than half of all Series A’s were $20M+ in 2022 for the first time.
The number of $20M+ Series A’s was 187 in 2022, representing 52% of all Series A’s in 2022. By comparison, the number was 203 in 2021, representing 43% of all Series A’s in 2021. The percentage of $20M+ Series A’s was 4% in 2010!
We are now looking closer at $30M+ Series A’s as the new “Jumbo Series A”. The number of $30M+ Series A’s was 67 in 2022, representing 19% of all Series A’s in 2022. By comparison, the number was 73 in 2021, representing 15% of all Series A’s in 2021. The percentage of $30M+ Series A’s was 2% in 2010.
A methodology note here as per previous years–the Series A’s figures are not affected by growth equity financings labeled as Series A’s. In our methodology, we manually remove those deals so that the V21 dataset includes venture-backed startups only and excludes mature bootstrapped companies and company spinouts.
Pre-money valuation increases
As with financing sizes, pre-money valuations increased for Seed’s, Series A’s, and Series B’s for 2022 in total. The median Seed pre-money valuation was $18.0M in 2022, up 30% from the prior year. The median Series A pre-money valuation was $60.0M in 2022, up 9% from the prior year. And, the median Series B pre-money valuation was $227.5M in 2022, up 14% from the prior year.
A “Rule of 3x” (pre-money to pre-money between rounds) had been consistent over the years. In 2022, the pre-money Seed to pre-money A returned to 3.3x from 4.0x in 2021. The higher multiple in 2021 was driven by A’s as a primary entry point for Cannonball Effect financings. The pre-money A to pre-money B increased to 3.8x in 2022 from 3.2x in 2020 and 3.6x in 2021.
As with financing size, the quarterly data for pre-money valuation revealed the effects of the market downturn. The median Series A pre-money valuation decreased by 34% from $68.8M in 1Q22 to $45.3M in 3Q22, and the median Series B pre-money valuation decreased by 45% from $280.0M in 1Q22 to $155.0M in 3Q22. The fourth quarter of 2022 showed a partial return. The median Series A pre-money valuation increased to $60.0M in 4Q22, and the median Series B pre-money valuation increased to $255.0M in 4Q22.
Round numbers increase
The average “sequential number of rounds” appears to have leveled off for Seed’s and Series A’s but continued to increase for Series B’s. The average Seed financing was round number 1.9 in 2022, unchanged from the prior 6 years. The average Series A financing was round number 2.9 in 2022, unchanged from the prior 4 years. The average Series B financing was round number 4.4 in 2022, an increase of 6% from 4.2 in 2021.
Cumulative capital raised prior to round increases
The cumulative capital raised prior to a round continued to increase in 2022. V21 companies raising Seed financings had raised an average of $1.3M in 2022, up 39% from 2021. V21 companies raising Series A’s had raised an average of $5.1M in 2022, up 13% from 2021. And, V21 companies raising Series B’s had raised an average of $28.7M in 2022, up 6% from 2021.
By quarter, the cumulative capital raised reflected a return in 4Q22. V21 companies raising Seed’s had raised an average of $1.4M in 4Q22, up from $1.1M in 3Q22 and near the high of $1.4M in 4Q21. V21 companies raising A’s had raised an average of $5.9M in 4Q22, up from $4.4M in 3Q22 and near the high of $6.0M in 1Q22. And, V21 companies raising B’s had raised an average of $38.2M in 4Q22, up from the previous high of $29.7M in 3Q22.
Years since founding increases significantly for series B
“Years Since Founding” increased significantly for Series B’s in 2022 due to the pull back of Cannonball Effect financings, which often involved large financing amounts in relatively lower ARR companies. The median years since founding for Series B’s was 4.60 in 2022, up 16% from the previous year. Meanwhile, the median years since founding for Series A’s decreased to 2.45 in 2022 from 2.62 in 2021, and the median years since founding for Seed’s increased to 1.27 in 2022 from 1.08 in 2021.
By quarter, the years since founding reflected an increase from 3Q22 to 4Q22. The median years since founding for Seed’s, Series A’s, and Series B’s increased by 28%, 14%, and 6%, respectively, from 3Q22 to 4Q22.
Revenue generation slides downward
The proportion of companies that are revenue-generating decreased for Seed’s, A’s, and B’s in 2022, albeit still at astonishingly high levels. 73% of companies raising Seed financings in 2022 were generating revenue, down from 77% in 2021. 91% of companies raising Series A financings in 2022 were generating revenues, down from 94% in 2021. And, 96% of companies raising Series B financings in 2022 were generating revenues, down from 99% in 2021.
Most of the decrease in 2022 was driven by V21 firms’ deal volume in Web3. We return for the below chart to the V21 firms’ deal volume analysis, as discussed at the beginning of this study. The quarterly percentage of V21 firms’ deals (first-time, early-stage) in Web3 grew from between 1%-5% in 2020 to between 7%-17% in 2021 and between 13%-23% in 2022.
We return to the V21 dataset to understand the characteristics of the Web3 companies. Web3 companies are generally more often pre-revenue than non-Web3 companies. 61% of the Web3 companies receiving Seed financings in 2022 were for revenue-generating companies, as compared to 76% for non-Web3 companies. 84% of the Web3 companies receiving Series A financings in 2022 were for revenue-generating companies, as compared to 92% for non-Web3 companies. And, 92% of the Web3 companies receiving Series B financings in 2022 were for revenue-generating companies, as compared to 97% for non-Web3 companies.
By quarter, the proportion of companies that are revenue-generating had a slight uptick from 3Q22 to 4Q22. 72% of companies raising Seed financings in 4Q22 were generating revenue, up from 68% in the prior quarter. 92% of companies raising Series A financings in 4Q22 were generating revenues, up from 90% in the prior quarter. And, 94% of companies raising Series B financings in 4Q22 were generating revenues, up from 91% in the prior quarter.
Time machine analysis
As we introduced in prior studies, the cross-class analysis for “look-alikes” between current-era financings and preceding-era deals remains instructive. 2020 is a pivot point where “Seed is the new A” and “A is the new B."
This year’s update is:
2022 Seed vs 2010 Series A
Pre-Money Valuation: $18.0M (Seed) vs. $8.7 (Series A)
Size: $6.0M vs $4.7M
Sequential Round Number: 1.9 vs. 1.5
2022 Series A vs 2010 Series B
Pre-Money Valuation: $60.0M (Series A) vs. $33.5M (Series B)
Size: $20.0M vs. $11.0M
Sequential Round Number: 2.9 vs. 2.7
Each year, we update the V21 dataset and make improvements to our research process. This year, we of course added a new year’s worth of data, which impacts prior years’ data due to the longitudinal financing histories of newly added V21 companies. In order to ensure data consistency, we re-downloaded and re-ran the entire dataset from PitchBook back to 2010. Many thanks to PitchBook for enabling us to start with a fresh dataset each year. Finally, we made minor improvements in our use of PitchBook’s deal type and raised to date data fields. For readers unfamiliar with the V21, a quick recap of the methodology is in the V21 2020 study.
A holding pattern emerges
In a market correction, it’s generally assumed that deal volumes, sizes and valuations will all fall together. And for most of 2022, that was indeed the case. That’s why it is interesting to observe the rebound in Q4 of deal sizes and valuations, while deal volume continued to decline. We believe this is likely a “flight to quality." There is a lot of dry powder in venture firms’ coffers, but not nearly as much conviction about investing it. So when a highly attractive deal emerges, it is met with the energy of pent-up demand that defies the gravity of the down market. Meanwhile “rank and file” deals are greeted with a lot less enthusiasm and a general bias towards inaction.
How long will this persist? This is partly a function of macroeconomic factors – when will inflation be tamed? What is the likelihood of a recession? But it is also a function of investment methodology. A generation of venture investors that grew up in the long bull market have never operated in this “bottoming” phase of the cycle. The decision rules they have lived by are now largely invalidated; new approaches are required to develop conviction in today’s world. Methodological shifts take time, and in some cases may never occur, with some investors instead choosing the “safer” path of doing nothing or pursuing only the most obvious of targets. Of course those choices will lead to missed opportunities, but sometimes the “fear of looking stupid” can be just as powerful as the “fear of missing out”.