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The first quarter of 2022 was a great period for startups to raise venture capital compared to any time other than the bonkers 2021 private-capital cycle. Although there was still ample capital in the market and deal-making appeared strong at the start of this year, we’re seeing stress cracks appear across the startup sector.

What gives?

It appears that many startups raised money last year beyond the limit of defensible pricing, leaving them in an effectively zero-margin situation. Any startup that raised at a two- or three-figure revenue multiple in 2021 now faces an environment of declining values for technology companies and high-profile investor groups retreating from deal-making. This could lead to down-rounds (or worse).

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What makes the situation ironic is that we’re starting to see the startup layoffs, implosions, and valuation cuts that appear when venture capital is frozen. New data from PitchBook that The Exchange reviewed this morning paints a picture of a still-warm U.S. VC market. And yesterday, when we explored the global venture market with data from Crunchbase News, we saw a similar picture. (More information drops tomorrow, so expect more detail regarding sectors and geographies as the week continues.)

Things just aren’t that bad in the startup market, at least according to investment totals that we tallied in the first quarter. And yet you can’t fire up Twitter without running into startup doom and gloom these past few weeks. So what’s happening?

Unicorn fragility

Early PitchBook data shows that there were likely 4,822 venture capital rounds in the United States during Q1. Those deals were worth $70.7 billion, the data company said. If the Q1 pace is maintained for the rest of the calendar year, those work out to 19,288 deals and $282.8 billion.

Compared to 2021 totals from the same source, U.S. VC activity in 2022 is on pace to surpass last year’s deal volume (17,105) while falling short of its dollar volume ($342.2 billion). That’s hardly a collapse, frankly, even if all startups would like to see more capital disbursed each year than the last.

The irony of today’s situation is that if 2021 had been less exuberant, fewer startups would be facing valuation and cash issues this year.