Entrepreneurs Need Investors: Latest Data on Venture and Angel Investment

By SBE Council at 22 February, 2023, 11:50 pm

SMALL BUSINESS INSIDER

by Raymond J. Keating –

People, including politicians, love entrepreneurs. And understandably so. The individuals who start up, build, own and operate businesses of all types and sizes are the most critical players in the economy. They drive innovation and growth. They are incentivized, in part, by profits, but no matter their personal motivations, they must serve others well in order to succeed.

Too often forgotten in the entrepreneurial equation is the important role that investors play. In fact, SBE Council ran a piece for Thanksgiving making the point that we should be thankful for what investors do in the economy. In that post, I explained:

“Entrepreneurs need financial capital to start up and build businesses, to invent and innovate, and to drive economic, income and employment growth forward. Depending on the industry and the stage of growth, angel investors and venture capitalists are vital to funding entrepreneurial undertakings. Angel investors tend to be wealthier individuals who invest their own funds in a startup or early-stage business. Meanwhile, venture capitalists can be individuals or a group of investors who invest in a developing business, and while some venture capitalists invest in startups, venture capital tends to go to businesses that have a bit more of a track record. Also, online crowdfunding investment has flourished in recent years, with a larger number of investors providing smaller investment amounts, as opposed to more traditional angel and venture capital investing, for a new or growing business venture. If we’re thankful for entrepreneurship, as we should be, then we must be thankful for those who invest in entrepreneurial ventures as well.”

Let’s take a look at some of the latest data on investment in entrepreneurial ventures – specifically, the latest estimates on venture capital and angel investment.

According to the most recent edition of “The Pitchbook-NVCA Venture Monitor,” 2022 turned out to be a robust year for venture capital, with deal value coming in at an estimated $238.3 billion. While that was down from $344.7 billion in 2021, the 2022 level remained far above the annual numbers going back to 2012.

Data Source: The Pitchbook-NVCA Venture Monitor

When looking at the quarterly data, however, it must be noted that investment declined throughout 2022 – from $93.9 billion in the fourth quarter of 2021 to an estimated $36.2 billion in the fourth quarter of 2022.

The deal count largely tracked the dollar value, rising somewhat steadily from 8,076 in 2012 to 18,521 in 2021, and then declining to an estimated 17,990 in 2022.

According to this report, angel and seed stages investment hit a record level in 2022 at an estimated $21 billion. The deal count came down a bit from the previous year – registering 7,648 in 2021 and then an estimated 7,261 in 2022. But that, again, was well above previous years’ levels (which came in at 3,373 in 2012 and rising to 5,914 in 2020). The quarterly data saw declines from the second quarter of 2022 through the end of the year.

Those concerned about entrepreneurship in the U.S. generally should be pleased to see these levels of investment in the entrepreneurial sector of our economy. Of course, the quarterly declines throughout 2022 warrant watching.

Meanwhile, policymakers would do well to show that they understand the full economic story regarding entrepreneurship, including the crucial role played by investors. If they do get it, then efforts to hike income and capital gains taxes, including on upper-income earners, and to impose a wealth tax, would be replaced by efforts to provide substantive and permanent tax relief.

That definitely would include reducing capital gains tax rates, and indexing gains for inflation in order to reduce the real capital gains tax rate, given that capital gains taxes directly impact the returns on entrepreneurial ventures. As the old saying goes, the more you tax something, the less of it you get.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.