How is capital feeling and acting in b2b software?

I’d like to thank the 52 capital providers who participated in our 3rd annual capital provider survey. Their anonymized input has provided a treasure trove of quantitative and qualitative information to convey valuable insights to our ecosystem on their:

1. Capital bases, investment focuses and portfolios goings on
2. Investment activity
3. Market sentiment
4. Strategy shifts

I put together this deck where you can see the full synthesis. Feel free to share the deck link, which is open for anyone to view.

High-level view below.

Survey Participants Breakdown

In this year’s survey, 52 capital providers shared their market perspectives and sentiment along with detail on their deployment and fundraising activity.

We broke down respondents by ‘type’ and ‘investments stage’ which is highlighted below:

Top Takeaways

Investing Activity

• Increased Activity Among Lenders: Non-bank lenders have reported a significant increase in activity in the first half of 2024, with 59% being more active compared to the same period in 2023. This marks a nearly 50% increase from last year, signaling robust lending momentum. Bank lenders also showed a notable uptick in activity, with two-thirds reporting higher activity levels compared to the previous year, and none reporting decreased activity.
• Equity Investment Trends: Equity investors, particularly those focused on A/B/Growth stages, are also seeing an increase in activity. 44% of equity investors reported being more active in 1H 2024 than in 1H 2023. However, there is a growing bifurcation in the market, with some investors pulling back, as evidenced by 35% of? Seed/A investors reporting they were less active in 1H 2024 vs. 1H 2023.
• Bridge Financing Expectations: A significant portion of capital providers (35%) anticipate that more than 25% of their portfolio companies will require bridge financing in the next 12 months, an increase from the 22% who had similar expectations last year. The responsibility for this funding is overwhelmingly expected to fall on existing equity investors (still appetite and powder to do so?), with a smaller role for new equity investors.

Sentiment

• Positive Shift Despite Lingering Neutrality: There has been a noticeable shift towards positive sentiment among investors, with over 50% of equity investors expressing optimism for the next 12 months. This is a marked improvement from the previous year, particularly among Seed/A investors, where positivity has increased by 29%. However, neutrality remains high, particularly among A/B/Growth investors, with over 70% expressing neutral sentiment. This suggests that while the outlook is improving, many investors remain cautious as they navigate the current market environment.
• Debt vs. Equity Sentiment: Lenders have also seen an increase in positivity, with a 9% shift from neutrality to positivity. However, the level of negative sentiment remains relatively unchanged from the previous year, indicating that while there is cautious optimism, concerns about the broader economic environment persist.
• Cautious Optimism in Qualitative Assessments: Qualitative responses reveal a mix of optimism and caution. Many investors believe the market has bottomed out, with some expecting gradual improvement. However, there is still concern about the impact of previous overfunding and overvaluation, particularly in later-stage investments.

Strategies

• Increased Conservatism and Discipline: Many investors have continued to raise the bar for investability, with a focus on capital efficiency, fundamentals, and disciplined deployment of capital. This conservative approach is reflected in a shift towards smaller check sizes, more logos, and a greater emphasis on downside protections, particularly among lenders.
• Focus on Valuations and Fundamentals: Growth remains important but has been deprioritized in favor of investments with strong fundamentals (mainly capital efficiency) and attractive valuations. Investors are increasingly seeking companies with more traction, scale, and liquidity, while avoiding high-burn businesses. There is also a notable shift towards later-stage investments and secondary opportunities, as investors look for more secure and scalable opportunities in a challenging market.
• Sector Focus Adjustments: Some investors are adjusting their sector focus, particularly by avoiding the GenAI bubble and instead targeting companies that are solving real customer problems. This shift reflects a broader trend towards more pragmatic and sustainable investment strategies in the current environment.

Investor Sentiment- Qualitative

Our question to all participants:

Please provide a short statement about your thoughts on the current market.

Sharing a few responses broken down by investment stage.

Seed/A Equity Investors

Company performance has been trending up, and the shift in mindset towards capital efficiency has reduced the need or desire for companies to raise large dollars from VC. The availability of secondary has also decreased.

Seed still active, Series A coming back to life. Many investors and companies are still working out the overfunding bubble at the end of the ZIRP era. Limited liquidity at the later stage, either public markets or large M&A, everyone waiting to see where prices land. LPs are trepidatious, disillusioned with TVPI and looking for DPI.

Series A/B Growth Equity Investors

Upper end has too much money chasing too few opportunities, VC still has long time horizons and risk, “early growth equity” has lots of attractive companies not requiring large sums of growth capital with lots of exit options.

For SaaS businesses it's either a needed recorrection or a new normal.? I'm not sure which yet, so staying cautious about engaging in new deals with suspect exit horizon.

Non-bank Lenders

Challenging, tougher for all but the best performing companies.? Mindset still needs to change more to match the market environment for capital.

Fractured - down the fairway SaaS w/growth, hyper competitive for capital. Anything else, it's crickets but the borrowers still aren't acknowledging that fact when negotiating with lenders.

Bank Lenders

New entrants into the venture debt space with little to no credit/cycle experience are going to cause major issues with quality startups in 12-18 months. It's easy to throw term sheets after an equity raise, but it's not so easy to be accommodating and helpful when the inevitable wrinkle comes when runway is low.

Thanks again to all contributors and readers! If you enjoy what you read, I’d appreciate you sharing with your network!

If you’d like to discuss, collaborate or just catch up, reach out [email protected].

About Bigfoot Capital

Bigfoot Capital offers growth-oriented loans for B2B software companies with $2M- $20M in revenue. We pride ourselves on partnering with companies and their stakeholders to provide a capital partnership that comes with stability and support.

If you operate or support a B2B software business and want to learn more about alternative capital options that preserve equity, get in touch with our team today.