After almost a decade of easy money, the VC party may be over but the focus of fund managers on disruptive tech start-ups shows no sign of waning. Q2 saw the largest quarterly drop in start-up funding in nearly a decade (by 23%), according to data from CB Insights.
- Q2 saw the largest quarterly drop in start-up funding in nearly a decade, by 23%
- Most affected are late-stage start-ups and parts of fintech, which captured one in every five VC dollars last year
- Yet as dry powder builds, technology still offers the most attractive investment opportunities across VC, according to survey
After almost a decade of easy money, the VC party may be over but the focus of fund managers on disruptive tech start-ups shows no sign of waning.
Q2 saw the largest quarterly drop in start-up funding in nearly a decade (by 23%), according to data from CB Insights. The hangover appears worst for some late-stage start-ups and in fintech, which captured one in every five VC dollars last year, but the $108.5 billion total in Q2 was still the sixth largest quarter for investment on record.
Indeed, global start-up funding is slowing but still exceeds pre-pandemic levels, both by deal number and total deal value.
A Private Equity Wire survey during July revealed the majority of respondents (57%) believe technology still offers the most attractive investment opportunities across VC. This compares to only 7% for consumer/retail investments, and 13% for life sciences. The findings were explored in the latest Insight Report ‘Silicon Valley Blues: How VCs are adapting to a down market’.
“It may seem like there has been a lot of hype, but the reality is many technology businesses are building the future of digital applications and tech infrastructure – that underlines basically everything we do,” says Nic Brisbourne, CEO and managing partner at Forward Partners. “Of course, market conditions have an impact and investors need to be more discerning than ever, but if a start-up is genuinely providing a solution to a big problem facing businesses, that is where the growth will be, and investors will follow.”
Dry powder in the asset class has increased by $100 billion in 2022 already, and now stands at $539 billion, according to Preqin. But given VC strategies can differ, opinions vary on where this doubling down is taking place. All agree that technology – whether this be Web3, deep-tech or blockchain – will continue to drive growth.
“VCs are being much more thoughtful and robust about which companies in their portfolios they’re going to continue to support and doubling down on what they believe to be long term winners,” says Dan Aylott, head of European private investments at Cambridge Associates. “There will be pockets of opportunity and I think the savvy GPs will be waiting to play offensive in some of those areas.”
More broadly, investment rounds are being extended and have shifted in favour of fund managers with capital to deploy, instead of previously bullish start-up founders.
Predictably, there is also greater focus on start-ups less exposed to a cyclical downturn and a stronger line is being drawn between B2B and B2C start-ups in the crypto and blockchain world in particular.
“We are deliberately focusing on companies that we believe to be operating in fundamentally defensive or sectors that are more recession-proof and inflation protected,” says Natalie Hwang, founding managing partner of Apeira Capital Advisors, a VC investment and advisory firm.
In fintech, debt collection or debt resolution and PropTech companies are considered counter-cyclical but it can be difficult to find public market valuation comparables here. Climate-tech and VC start-ups based on the energy transition are also showing signs of growth, despite a broader market slowdown. In Q1 this year, five climate-tech investments made it into CB Insight’s top 10 lists covering seed and venture capital rounds, growing to eight by Q2. Since 2017, the sector has tripled in size, according to PitchBook data.
Key Takeaway – GPs | The ‘hype’ sectors of 2021 will receive less attention this year but the underlying technology infrastructure that helped create them will continue to drive forward VC in the years to come