As the market downturn sees some US tech investors and startups hunkering down, others continue as normal; Q2 average investment deal sizes are at record levels
Market correction leaves some startups in crisis as others take employees on vacation — Why a 2022 Recession Would Be Unlike Any Other
Context & Ripple Effects
This is the second act of a correction that began earlier in the year, when tech stocks' poor IPO performance pushed some venture firms to start cutting back investments and renegotiating startup valuations. By Q2 the pullback had produced a strange split: PitchBook's data shows average deal sizes at record levels even as many investors and founders hunker down.
The split echoes the pandemic-era pattern, when US funds raised $21B across 62 funds in Q1 2020 yet concentrated $34.2B into 27% fewer deals than a year earlier — dollars kept flowing while the number of recipients shrank. The later retrospectives of 2022 as a dismal year for startups confirm where this trajectory ended.
First-order effects
- Startups divide into two camps immediately: those facing crisis-mode renegotiations and those flush enough to send employees on vacation, with the record Q2 average deal size meaning new money concentrates in fewer, larger rounds rather than spreading broadly.
- Investors who pulled back after the IPO slump now compete only on selective deals, raising the bar for which startups can still raise at all.
Second-order effects
- Mid-sized startups outside the mega-round cohort face a narrowing path: with average sizes at records but overall activity contracting, they are squeezed between scarce small checks and large rounds reserved for proven names.
- The 2020 precedent suggests limited partners and funds respond by consolidating into fewer, bigger bets — pressuring smaller funds that cannot write record-size checks to specialize or exit.
Third-order effects
- If the barbell holds, US venture structurally polarizes into a mega-deal tier and a frozen long tail, prefiguring the plummeting investment and scarce public listings that made 2023 look even harder than 2022.
- Repeated cycles of 'dollars up, deals down' normalize concentration of venture capital, making access to funding itself a competitive moat for the few rather than a commodity for the many.
The trend: US venture capital is polarizing during downturns — record average deal sizes coexisting with a broad funding freeze — concentrating capital in fewer, larger bets each cycle.