Venture capitalists are forecasting their worst quarter in nearly a decade as economic uncertainty and meager returns have prompted investors to hold back after the 2021 startup funding boom.
According to a recent report from CB Insights, global financing to startups fell 23% in the second quarter from the first quarter, 2022, to $108.5 billion.
According to Bloomberg News, this happened as the U.S. pushed nearly half of all funding to $52.9 billion, which was still 25% lower than in the previous quarter and the lowest amount of funding since 2020. The report indicates that this has been the case in recent weeks. impacts on private companies as well.
The number of deals fell 15% globally, a decrease that corresponds to a sharp decline in the number of investor exits, which fell by 16% in the quarter, as fewer startups go public than in the previous quarter and less so-called unicorn status with a valuation of over $1 billion. The number of mergers and acquisitions fell by 16%, the lowest in six quarters.
what they say
The funding slowdown is being driven by economic concerns and declines in technology stocks, said Sharla Grass, a director of VC firm Greycroft. “We see this broadly in the market.”
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Venture firms, including Sequoia Capital and Lightspeed Venture Partners, warned their portfolio companies in May to prepare for the end of the good times after a decade of cash flow with increasing volumes. Sequoia’s investors pointed to an imminent long-term recession, calling it a “melting pot moment,” a prediction reminiscent of the company’s 2008 “RIP Good Times” memo. Sequoia told the founders to “do the austerity exercise,” which means they track their expenses and look for places where they can cut costs in the short term if necessary. The climate for tech investment has changed dramatically in recent months. After a brief period of uncertainty at the start of the Covid-19 pandemic, startup investment activity skyrocketed, fueled by a newly remote world. That frenzy led to unprecedented amounts of money being funneled into startups in 2021. In early 2022, so many companies were raising funds worth $1 billion or more, meaning a new unicorn was minted about twice a day. In the second quarter, the number of new unicorns fell by 43% to 85. The top new unicorns in the second quarter were KuCoin, a global cryptocurrency exchange valued at $10 billion, and Elon Musk’s Boring Co., valued at €10 billion. $5.7 billion. Venture capital firms aren’t necessarily short of cash, as U.S. industry raised $73.8 billion in the first quarter — more money than in any other three-month period previously announced and more than the total for most full years. Yet major investors are more conservative in funding rounds. The number of so-called mega rounds, with funding over $100 million, fell 31% in the second quarter from the first, the lowest level since 2020. “We see VCs increasingly advising companies seeking funding that if they have enough runway, it may be optimal to wait for the market to return to a more predictable, normal state,” Grass said. Early stage investment accounts for most deals so far this year, or 64% globally. Investors want to get in early before the company has reached its full potential to maximize returns on their investments.
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The report also highlighted the continued growth of startup activity in Denver, where investments jumped 111% in the second quarter. The city emerged as a technology hub during the pandemic, attracting $3.9 billion in funding in 2021 and $2.8 billion in the first half of 2022. Denver-based startups such as HR management platform Velocity Global and energy solutions firm Crusoe Energy Systems Inc. received a collective investment of $750 million last quarter.