The state of Venture Capital Funding: H1 2022

The current conditions of the venture capital market has been called into question in recent months. With market volatility, resurgences of Covid-19 variants, global supply chain disruption. It has been predicted that Global venture funding for startups is set to fall by 19% in Q2 2022 from the previous quarter, amid tightening liquidity and a global meltdown in technology stocks, according to a report by CB Insights.?

With the first and second quarter of the year now behind us, it is important to understand some key figures and what they mean going forward for the Venture Capital Market this year and for years to come. Venture investing fell in the second quarter of this year for the first time in two years. Still, it is widely anticipated?that this downward trajectory will continue for the foreseeable future.

2021 was a great year for Venture capital funding and with large raises, several exits and mega rounds. This surge was predicted to continue into 2022 but this has not been the case.?

Overview: America

In Q1’22, VC investment in the US fell from the record-high seen in Q4’21, although it remained substantially higher than every quarter prior to 2021. The growth in numbers was due to the two largest deals for the quarter which were a $3 billion raise by Altos Labs and a $935 million raise by logistics company Flexport.

At the end of 2021, there was a backlog of highly valued private companies in the US that investors expected to IPO early in 2022. However, these IPO’s were stalled or halted amidst geo-political and macro-economic issues further aggravated by the sudden Russia-Ukraine war. Due to the knock on market effects, technology stocks were hit particularly hard, which in turn led to several businesses halting their plans to IPO until more favourable times.?

Ultimately, given the amount of dry powder available in the market, VC investment is expected to remain relatively robust in the US heading into the rest of 2022, the Russia-Ukraine war, rising inflation, and increasing interest rates will likely be major factors in investment conversations but investors are still interested in niche and growing businesses. Raising at the right valuation and with the right projections will in-turn attract investment is these uncertain times.?

Q2, 2022 does spark some concern as there has a clear drop in funding as shown above, and investment is at its lowest since 2020. Looking forward into 2022, it is clear that the exponential growth in 2021 occurred due to better market conditions caused by effects of the easing of covid restrictions and the heavy utilisation of technology that was leveraged by the pandemic as people were bound to their homes. 2022 is now a correction point, venture capital is still strong and in comparison to Q4 2020, Q2 2022 is still outperforming.?

Overview: Europe

Interestingly, VC investment in Europe was incredibly robust in Q1 2022. There were some massive rounds by Checkout.com in the UK ($1 billion) and Germany’s WeFox ($871 million). Other jurisdictions also attracted large deals, including Estonia (Bolt: $710 million), Finland (Relex: $566 million), France (Doctolib: $571 million, Qonto: $549 million, Back Market $541 million), Turkey (Getir: $768 million), Italy (Scalapay: $497 million), and Austria (GoStudent: $339 million). The geographic diversity highlights both the breadth of Europe’s innovation ecosystem and the rapid maturation of startups across the region.

INTERESTING FACT!

VC investment in the UK surged to a new high in Q1’22, because of a $1 billion raise for Checkout.com.

The UK market does continue to grow across industries that embrace digitization and tech-enablement. While interest rates are now on the rise, the significant amount of funds already raised will likely keep investment relatively steady.        

Update on Venture stages?

Interestingly, more money is being invested into start-ups in the form of seed opportunities.?

$3.1 billion invested in seed-stage companies in May. Seed funding, in fact, increased 11% from the average $2.8 billion invested monthly at seed in 2021.

Late-stage and technology growth investing has been the most impacted by this year’s venture pullback. Last month, venture investors globally spent $22.3 billion in the late- and growth-stage sectors—down 38% from the 2021 monthly average of $36.2 billion.

While growth equity investors last year invested record dollars in high-growth earlier-stage companies, they’ve scaled back this year from early-stage rounds. All in all, early-stage funding reached $13.7 billion last month, down 22% from the average monthly funding in 2021 at $17.6 billion.

Reasons behind the drop

The current drop in funding is due to a two-year period of soaring valuations and fundraising. This crisis results from global supply chain disruptions caused by lockdowns, the Russian war against Ukraine, a meltdown in technology stocks, and a spike in inflation and subsequent interest rates. The investment market plummeted at the start of the epidemic but recovered over the following months. The adoption of digital services by consumers stranded at home caused it to soar later.

Money managers and venture investors avoid companies with high values while urging businesses to reduce spending and boost their margins. VCs, as opposed to growth equity firms, believe that now is a good time to invest if they have capital reserves ready to deploy. During this time it will be common to see investors re-investing in their current portfolio as oppose for looking for new opportunity on the verge of potential recession.?

Start-ups that were once seen as the next big players have been forced to downsize staff, spend less money, delay initiatives, and scale back aspirations due to the worsening economic headwinds and changing investor opinion.?

In layman’s terms, investors appetite for risk is currently very low. Some investors will halt their effort completely until the storm has passed, where as others see this as an opportunity to take advantage of lower valuations or discounted shares.?

Looking to the rest of 2022

Venture funding is not going anywhere anytime soon. Figures are very unlikely to reach the highs of 2021 but opportunity is still readily available, and dry powder is being held in abundance – it’s just a waiting game for market stabilization before the floodgates reopen. However, in true comparison to 2020, In fact, a drop of 50% would still see 2022 as one of the largest years on record for European funding – so there is no shortage of capital for you to access and no cause for concern.

Raising funds for your business in this time will ultimately be more challenging, but those who do manage to close funds and attract new stakeholders within these times can be very sure that their proposition is well positioned to thrive through the current economic conditions.?