CHART OF THE WEEK 📈
The global economic downturn has been taking a toll on asset classes, and the glorified start-up space is no exception to that trend.
Venture funding dropped to US$ 2.9 billion in the quarter that ended September 2022. Funding dropped to a third of what it was in the previous quarter and almost a quarter of what it was a year ago.
Why is this happening?
- Liquidity — Higher interest rates and deteriorating economic conditions have led to liquidity drying up from the market, across all markets
- Risk aversion — Tough times also lead to higher risk aversion, and investors moving to safe assets. The VC space is one with significantly higher risk than other asset classes, thereby reducing overall deployment. Moreover, within that, VCs are increasingly looking to take safer bets (more stable businesses, with a focus on monetisation), or smaller bets in newer companies
Who is most affected?
- The slump has impacted all industries, but particularly those with high growth but murky monetisation
- Companies with a “growth at all costs” mentality are struggling because they have to use expensive financing options like convertible notes and venture debt to stay afloat
- Also notable is the disproportionately negative effect a significant resurgence of offline markets has had on industries like Edtech, leading to massive layoffs, abandoned funding rounds, and valuation mark-downs
What happens next?
- Due to the dramatic shift in the market over the past six months, late-stage deals that were discussed just a few short months ago have only two possible outcomes: failure or settlement at significantly lower valuations
- It will be more challenging to raise further rounds for most companies, with the exception of those in the top decile of performance and potential
- We should expect to see more consolidation in the industry
In Sum ➕
- Due to market volatility and increased aversion, deployment has been reduced. However, VCs are sitting on dry powder, which is available for future investments
- The approach of the VCs seems to bake in a prolonged downturn, which makes it sensible for capital to be deployed over time and resulting in better buying prices on investments
