Economics / Investing / Resources / Venture capital

Baltimore’s VC slowdown arrived in Q3 — and may mark a return to normal

Investment dropped down to under half of last quarter's total deal flow. Baltimore-based investment leaders weighed in on what the national trends (and their regional manifestations) mean.

Baltimore's skyline, from the water. mkriedel

Editor’s note: These figures may vary slightly, as some deals aren’t accounted for until weeks after quarterly VC reports are published.

With central banks across the globe tightening monetary policy and continuing to focus on curbing inflation over stimulating growth (i.e. the Federal Reserve’s scheduling of at least two additional rate hikes this year, bringing the total to five since March), recession fears are materializing in VC markets.

However, although this quarter shows “signs of distress in response to ongoing economic headwinds,” market watchers remain cautiously optimistic. This year’s activity, while generally being lower than the exceptionally high market of 2022, it remains above historic averages.

This general outlook, and the quote above, come from the Q3 2022 Venture Monitor, the latest edition of PitchBook and the National Venture Capital Association’s (NVCA) quarterly market report. Here are some of the takeaways from the new publication, which debuted today — and what it ultimately suggests for the Baltimore area’s funding ecosystem.

First, the national picture

The Venture Monitor remained broadly optimistic about VC markets while noting that the Q3 data itself “paints a mixed picture for the VC industry.” About $43 billion was invested across 4,074 deals, which is about less than half the $82.8 billion invested throughout about 3,518 deals in 2021’s third quarter.

Deal value continued to drop across all investment stages, hitting a nine-quarter low; both total dollars invested and the median deal size have decreased over the year. However, at this point in 2021, the $194.9 billion invested already surpasses the yearly totals for all prior recorded years except 2021.

Given the public market volatility and depressed valuations, exits are down 50 percent.  2022’s 59 initial public offerings sharply contrast with the 303 and 145 in 2021 and 2020, respectively.

“The VC slowdown narrative that has been pervasive in the market this year has finally materialized in the data, with nearly every metric aside from fundraising falling sharply in Q3,” said John Gabbert, PitchBook’s founder and CEO, in a statement. “The VC ecosystem, however, has shown remarkable resiliency in the face of continued economic headwinds, raising record levels of capital and closing an unexpectedly high number of deals. In many ways, 2021 was an outlier year, and the VC market is now returning to pre-pandemic levels and long-term trends of steady growth.”

What this means for Baltimore

The funding slowdown is apparent in Baltimore — and perhaps quicker to slow than other geographies, says Conscious Venture Partners managing partner Jeff Cherry.

“With the public markets in turmoil and all the talking heads and Wall Street types saying we’re heading towards a recession, people are going to be more cautious,” Cherry told via email. “Baltimore in general is a conservative town, so it certainly follows this trend — maybe even foreshadows it.” $68.54 million was invested in 13 companies in the Baltimore metropolitan statistical area (MSA) this quarter, down from the previous two quarters’ flows of $150 million and $204 million, respectively. This decline mirrors last year’s activity, which also cooled off in the third quarter.

This number doesn’t appear to include CraniUS’ $19.4 million raised in a Series A fundraising round that we reported on in September. PitchBook did not immediately return a request for comment on this seeming omission.

The report’s chronicle of enduringly robust investment in health, clean tech, energy and transportation is evidenced in the Baltimore MSA’s top 10 deals, half of which were transit- or healthcare-related.

Jessup’s Vorbeck Materials, which manufactures graphene communications tech, took the top spot by raising $25 million in later-stage financing. DrivenIQ, a data marketing firm in Towson, raised $15 million while AeroVanti, a private aviation membership service in Annapolis, raised $10 million — both in Series A rounds. Baltimore’s Mira1a Therapeutics, which is developing a drug to combat chronic pain, raised a $7 million seed round and exceeded the national seed average of $4.6 million. Despite its website mentioning an HQ in DC, VerImmune, which is developing an immune system-based cancer treatment, rounded out the top five with its own $3 million seed round.

While fundraising reached a new annual high, the Venture Monitor reported that 62% of the capital raised is going to only 6% of funds. The consolidation troubles Cherry, whose Conscious Venture Fund has raised $16.8 million (including $1 million this past quarter) toward its planned $50 million goal. He noted that the trend can especially hurt founders from disproportionately underfunded communities.

Jeff Cherry. (Courtesy photo)

“Part of our mission is to get more capital into the hands of underrepresented founders,” Cherry said. “We have significant evidence that diversity is a competitive advantage, that we can find ideas that others are ignoring and investing in those ideas can create outsized returns. All of that is hard to do if the [limited partner, or LP] capital is still going to the same set of a few firms. There’s obviously bias in the LP ranks as well, and we’re doing all we can to get some of those LPs to make even small allocations to funds like ours, RareBreed Ventures and others.”

Companies are advised to steady their course as venture capital flows return to lower levels than last year. “Blitzscaling,” or rapid growth that may come at the expense of positive cash flow, is riskier as investor capital becomes more scarce.

“Founders will likely face some tough choices in the coming months as they work to position their companies for long-term success,” said Pamela Aldsworth, head of venture capital coverage for JPMorgan Chase, in a statement. “For those with ample runway, now is a good time to block out the noise and build.”

Cherry, for his part, offered the same advice to founders as last quarter: “If you have access to capital, raise as much as you can within reason as the markets will be tightening before things get better, and it could last a while.”

Another Baltimore-based tech and investment leader — Ken Malone, the executive officer of Early Charm Ventures — also advised that the VC trends shouldn’t sway founders anyway: “The overwhelming majority of IP-intensive and tech-enabled startups are not good fits for venture capital funding and shouldn’t waste their time chasing it.”

Companies: Early Charm Ventures / Conscious Venture Lab / National Venture Capital Association

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