VC markets are healthy, but M&A isnt

Investment Bank Piper Sandler puts out great quarterly data on the state of tech markets. Below are a few charts from their report, along with some of our views at Blossom Street. The first table is about VC investment volumes.

Back to normal. While we’re way down from venture capital deployment in 2021 and 2022, those were non-sensical years with very unhealthy investing (high cash burn business getting money and valuations they didn’t deserve). 2023 is going to be a return to the normalcy of 2014 to 2019, which was a great period for SaaS generally.

The cycles are extreme in venture. Back in 2005 and 2006, we saw an even wilder time in venture. Deployment doubled in 2005 to $47bln up from $23bln in 2004, and then tripled to $154bln in 2006 from $47bln in 2005. Those are deployment explosions in excess of what we saw in 2021 and 2022. Venture capital goes through cycles, and we’re coming out of one now which is a good thing. There will be other big up cycles in the future, as well as equally large down cycles.

The second chart that stood out to us is around private equity deployment and dry powder.

Plenty of dry powder. Dry powder is at an all time high in private equity, totaling $2.3trln. That money will eventually find its way into companies.

Timing is uncertain. When will that dry powder get deployed? Is 2024 going to be a bonanza given deployment in 2023 is lighter relative to 2022 and 2021, but dry powder is so high? It’s impossible to tell. Dry powder has hit a new high every year since 2012, but deployment has not grown consistently with dry powder. The 2017 and 2018 periods really stand out as the level of deployment in those years ($13bln each) was a low not seen since 2011 ($15bln) despite ever increasing dry powder. Ignore discussions of ‘dry powder’. There is no relation between capital on the sidelines and velocity of deployment.

So what’s the overall conclusion? Venture markets are healthy and back to normalized levels of deployment akin to 2014 to 2019 when things were actually quite good. The private equity M&A market is uncertain however. There isn’t a strong correlation between dry powder and deployment, so stay patient. Big thanks to Piper for the data. Reach out to Managing Director Varun Bhojwani to get on the distribution.

Visit blossomstreetventures.com for more SaaS data. Thank you for your readership.