Gloomy investment environment outlook

Q3 of 2022 has come to an end and we have not yet seen any change in the sluggish investment environment which I already touched upon in the last article. We much rather saw more of the same.?Analysts have predicted that, if the current trend continues, the year's total exit deal value is expected to fall below $100 billion for the first time in six years.

In this article, I want to dive deeper into the reason why investors are holding back their funds in the North American and Asian regions – with the exception of a few sectors.

Despite the rather gloomy outlook, there are also several elements to highlight that are weaving together a silver lining in the venture capital and startup ecosystem. For one, I will take a closer look at the startup culture in Eastern European countries and why they have become increasingly interesting for founders and investors alike. In addition, I would also like to focus on industries that are handling the slump quite well, the supply chain and cleantech sector being two relevant examples of this.?

Funding in Asia at Lowest Point Since 10 Quarters

In accordance with international trends in startup funding – we reported on this in detail in our last article – funding in Asia has plummeted significantly this quarter and is currently showing no signs of any uplift.

In numbers, investors infused only $21.2 billion into startups in Q3. What may sound like a lot at first, is actually a 26% decrease from the second quarter and a steep 56% from the third quarter of 2021. As a comparison, the amount invested this quarter is similar to the amount that was invested in Q1 2020, in the midst of the pandemic. It is also roughly the same amount that Adobe invested to acquire Figma recently.

India took the greatest hit in this quarter, raising only $2.9 billion in Q3, compared to the $8.5 billion of last quarter and $15.4 billion in Q3 2021.

There are a few upswings that can be noted though: Unsurprisingly, the e-commerce sector can boast healthy investments, the most prominent one being Singapore-based online shopping platform Lazada closing a $912.5 million investment round from the Chinese e-commerce behemoth Alibaba.?

Why is the Asian region taking such a large hit? One has to take into account that Asia is not alone in this global slowdown. However, there are certain factors specific to the Asian region that increased this effect. For one, the political tension between China and the West (specifically the U.S.A) is not helping venture capital at all. Neither are the tough regulations of the Chinese competition watchdog, which has been establishing itself as a force to be reckoned with by lashing out with hefty fines in all directions.?

At the very least, we have to dismiss the idea that everything might have continued as it started last year, where we saw a record number of investments in Asia? – $175 billion – setting an impossibly high benchmark.

North American Funding drops by 50 %

The Asian region is not the only one reeling from low investments and an overall decline in investors in the third quarter.?

Q3 in America saw $39.7 billion in investment funds. In comparison to last year, this is a 53% decline and in comparison to the last quarter, the decline lies at 37%.

So what are the reasons for this pullback in U.S. American and Canadian venture capital? First off, it is not a surprising trend, since investments have been decreasing all year through. One of the main reasons is the lack of IPOs and – correspondingly – the lack of pre-IPO rounds. Q3 also saw a sharp decline in tech and biotech shares causing investors to doubt the high valuations several companies in the sector had attained in the last year.

There are however also some success stories that can be shared as well: even in this sluggish environment, several North American Companies went public, most notably Rubicon, an online marketplace for waste and recycling, as well as D-Wave, a quantum computing company. Both were wrapped up in SPAC mergers.??

If we compare the numbers with the trends in the last two years, the situation does display a silver lining after all. The numbers are definitely better than in 2020. As already mentioned above in the recap of the Asian region, it doesn’t make sense to compare the numbers of this year with the record-breaking heights attained last year. At the end of the day, No upsurge lasts forever.?

Eastern European Cities Remain Hubs of Innovation

You can always count on Eastern European cities when it comes to acting as a creative hub for successful startups. What started in the early 2000s with international success stories like Tallinn-based videocall game changer Skype has been continued by multiple other unicorn companies, most recently by Kyiv-based workflow Automator AirSlate, whose valuation exceeded one billion $ on June 17 this year.?

What is the secret recipe to staying relevant as a city in a scene that is as dynamic as the startup environment, where trends sometimes pass by faster than seasons and the pressure to grow exponentially drives out many companies that are not able to achieve the so-called hockey stick growth curve?????

The key factor often lies in the hands of the government, which has to provide an optimal ecosystem that attracts and is able to hold entrepreneurial talent. Especially the latter (keeping the companies there once they are successful) is hugely important in order to prevent brain drain and to inspire the next generation to set up shop in the same area.

Vilnius is the perfect example of a city that has achieved exactly this. Lithuania’s extremely tech-friendly ecosystem has not only seen many Lithuanians (and their businesses) return to the capital during the pandemic but also host foreign companies from neighboring states.?

While companies like Skype, Vinted, or Github are the “poster boy” companies showcasing Eastern Europe’s ability to enable innovation, there are countless other successful companies with Baltic roots that have the potential to make promising additions to investors' portfolios.

AI Content Company Jasper Continues Unicorn Journey

In a successful Series A Funding, Jasper, a company that specializes in content creation with AI, secured US $125 million from top investors such as? Coatue, Bessemer Venture Partners, IVP, Foundation Capital, Founders Circle Capital, and HubSpot Ventures. What’s more, the platform just acquired Outwrite, a software that checks grammar and writing style with over a million users worldwide.

The AI content platform was created to help individuals and businesses with the creation and leveraging of their content strategies, including text and image adaptation across different languages.?

According to Jasper, the funds acquired in their Series A will be used to improve customer experience, further invest in the product, and bring Jasper to all the platforms creators use.

How does the future look for Jasper? According to CEO and co-founder Dave Rogenmoser, Jasper is a “[...] hypergrowth company that is also focused on profitability. The pandemic has accelerated this business, as organizations look for ways to find efficiencies within teams, AI generation is the natural choice to augment creators and teams.”

Rogenmoser’s positive outlook is backed by stats like a customer base of 70,000, as well as $40 million in revenue last year. In 2022, the company expects to more than double that revenue, as the hype around ad tech and mar tech continues.?

Lanzatech Lands Funding While in Midst of Merger?

With the ambition to build commercial-scale plants that turn captured carbon into fuel and other commodities such as ingredients for household cleaners, LanzaTech – a company specialized in renewable chemicals – has been able to secure $500 million in investment funds from Brookfield Asset, or much rather Brookfield Renewable, a subsidiary with a focus on sustainability. The deal size could double should certain milestones be met

LanzaTech is known for its carbon recycling technology. Their website describes their efforts as “retrofitting a brewery onto an emission source like a steel mill or a landfill site, but instead of using sugars and yeast to make beer, pollution is converted by bacteria to fuels and chemicals.”?

With cleantech being in the focus of many investors for some time now, this investment, which values LanzaTech at $2.2 billion, doesn’t come as a surprise. Moreover, LanzaTech is currently in the middle of a merger with a special-purpose acquisition company.

Clean technology, or cleantech, is known as the expanding market which refers to products, services, and technologies aimed at reducing negative environmental impacts through improving energy efficiency, the sustainable use of resources, or environmental protection activities.

Many factors, including the return of the USA to the Paris Agreement in 2021 and the popularity of electric vehicles, have seen investments in cleantech rise drastically in the past years. The worldwide cleantech is said to be worth about US$3.3 trillion in 2022, of course, a very enticing number for many investors, especially since this number is not starting to dwindle any time soon.

Flexport Financing Arm Receives $200 Million in Funding?

Much like e-commerce, one of the few sectors that survived the pandemic and even managed to thrive in it is supply chain management. Flexport, a supply chain startup valued at $8 billion, is the prime example in this case. Flexport moves freight globally by air, ocean, rail, and truck for the world's leading brands, while at the same time being known for high transparency when it comes to visibility and control, enabling their clients to anticipate costs and calculate their real revenue.

Flexport itself secured a $925 million funding round eight months ago and now its trade financing arm has complemented this by locking in $200 million in funding from Kohlberg Kravis Roberts (KKR), a global alternative asset manager focusing on private equity, fixed income, and capital markets.

Flexport Capital – the financing arm – will use the money to expand its market, which specializes in stabilizing cash flow for finance importers and exporters along the supply chain.

Looking at the overall global situation, this money can definitely be put to good use by Flexport Capital. Supply chain issues have been a thorn in the side of many entrepreneurs, individuals, and enterprises. While supply chains in Europe are restrained by the war in Ukraine, North America saw restrictions due to political difficulties with China, leading to massive delays and an accumulation of corresponding costs.

It is therefore not really surprising that, while many industries find themselves in a very underfunded situation right now (at least in comparison to one year ago), the supply chain sector is still going strong.

Peloton Continues Cutting Jobs?

Peloton investors continue to sweat, as the company cuts more jobs in order to slash costs. The fitness startup Peloton was a huge success story during the pandemic and has now been struggling as the lockdowns have ceased and life is returning back to “normal”. This has forced Peloton to a change in management and multiple layoffs this year, the most recent one encompassing 500 employees.

It was only in August that the New York-based company announced the elimination of about 800 jobs. In September, co-founder John Foley left the ship and was succeeded by acting CEO Barry McCarthy. After the announced layoffs, only about 3800 people will work for the company. About a year ago, there were more than twice as many.?

If the turnaround does not succeed in the next six months, Peloton will probably not continue as an independent company, CEO Barry McCarthy told the Wall Street Journal.

The combination of continued layoffs and management shake-ups is never good news for any stock, as is the case for the PTON, which, after seeing its peak in January 2021, has now been on a downhill ride, also caused by a strong and hungry retail environment — online and in stores — for which the company was only partially prepared.

German Food Delivery Startup Fails to Land Funding?

Similar to pandemic-hyped Peloton, Berlin-based Delivery service Gorillas is continuing to experience financial troubles after their soaring success in the past couple of years, according to various reports, the company is to be sold to its rival Getir from Istanbul. Both companies deliver food by express and Getir could expand its position in Germany and the UK with the takeover.

Gorillas CEO Ka?an Sümer has unsuccessfully attempted to land new investments for the delivery service for months now. In order to save money, Sümer laid off about half of the employees at the Berlin headquarters at the end of May. In addition, the branches in Italy, Spain, and Belgium were closed. While the takeover is not a done deal just yet, the Gorillas and Getir owners are said to be largely in agreement, according to media reports. Gorillas as well as Getir have so far declined to comment on a possible deal.?

?? What can we take away from this month’s recap? For one, it shows us just how much of an impact government regulation can have on innovation and the possible funding of companies. While Eastern European cities are flourishing in terms of startups and the corresponding creative energy that is attracting and keeping young talent, many companies in Asian regions see themselves restrained by harsh regulation that also tends to tighten the investors’ grip on their cash.?

Also, see very well how trend-driven venture capital and the startup bubble actually are. Former high-flying startups like Peloton and Gorillas – the latter having been named one of “Germany’s most interesting startups of all time” by one of Germany’s leading business magazines – are now reeling post-pandemic and laying off employees left and right. Other sectors, such as supply chain/e-commerce and cleantech are not only holding steady but gaining momentum in an environment that is now slowly but surely turning its back on the pandemic-driven products and innovations and turning its head to new trends.??