While many forecast 2022 will follow an upward trajectory to 2021, things have started instead , [+]
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When the pandemic-induced lockdown began to spread in March 2020, partners at some venture capital firms became concerned about overdue reforms. Instead, the opposite happened, and the pandemic pushed the market into one of the strongest bull periods on record. Now, amid a geopolitical crisis and a downward-trending stock market, some in the industry say the overheated venture capital environment is finally starting to cool.
investors tell Forbes Late-stage deal activity – which set a record for both deal count and investment volume in 2021 – has slowed significantly over the past few weeks. What helped drive the breakneck momentum in 2021, he says, may have been overbought in the late stages of crossover investors. These investors say the broader enterprise ecosystem is realizing the swollen price tag they were willing to buy to be among the hottest deals of 2021. And while the change so far has had the biggest impact at a late stage, the pullback is looming for Series A startups as well, he says.
A return to fundamentals is evident in board meetings, says Lauren Straub, a general partner at B2B seed-focused Bowery Capital, She says the meetings she attends put a new emphasis on hitting up financial metrics before heading out to raise the rounds. Straub says, although this may delay some founders to scale up to the schedule they created last year, the overemphasis on profitability isn’t a bad thing at all.
“How much can we back up with the numbers and data that we have on the product market fit? All of these things that can signal and de-risk a business are becoming more and more important,” Straub says. good multipliers too. But instead of 70x-80x which was normal in 2021, they are back to normal: 10x-20x. She says she knows of three startups that are currently looking to raise Series B rounds Despite solid growth and increased traction since their last run, they are aiming for several times less than their Series A rounds.
Recent data from Crunchbase shows that global funding is low. Startups raised $10 billion less in February than in January, the first such drop in years. Late-stage funding was down 19%, from $41 billion to $33.2 billion, and more insulated early-stage funding also slipped 17% from $18.4 billion to $15.3 billion. But these numbers are being compared with records. Even as below $10 billion, February 2022 is still up 24% from February 2021.
Prices have also started coming down. Philadelphia-based DBT Labs, which makes an open-source data analytics tool, raised $222 million in February at a $4.2 billion valuation. While a big boost from the $1.4 billion valuation the startup raised in June 2021, it’s less than the $6.2 billion the company originally asked for, as Forbes informed at that time. (As told by cofounder and CEO Tristan Handy Forbes That company could still raise $6.2 billion if it wanted to, but instead decided to raise at a lower valuation to protect employee stock options.)
While funding and valuations are trending down, investors say there is nothing to panic and this could be a needed respite. “It takes some time for founders, boards, employees to adjust to what they deserve,” says Eric Paley, a partner at Founder Collective. Forbes, “It was probably the biggest multiplier expansion ever in technology in the last few years. It’s hard to turn people off from those expectations.”
Mark Goldberg, partner at Index Ventures, says there has been some reduction due to fund logistics. Several firms increased their momentum last year to keep up with the market momentum, but this did not change the stipulated investment tenure of their funds or the amount of LPs offered by them. They say that they are holding back just to strike a balance.
Pale says that the market should enjoy the period of peace. He describes the past two years as the market being on its toes, leaning forward in the stories and dreams of entrepreneur pitches they’ve been hearing. He hasn’t fallen back on his heels, he says, but on the balls of his feet.
“It would be fair to say that as far as the public market is going down, it is still relatively aggressive compared to historical multiples,” says Paley. “It’s coming in more in line with the historical multiples. It’s not even up to the historical benchmark.”
Both Paley and Goldberg say moving out of last year’s environment, which prompted founders to continually raise money as funds hit their door, is actually a good thing. Paley calls continued fundraising “inefficient entrepreneurship,” and Goldberg says that not having the pressure to continually increase means founders will be able to focus on actually building their companies.
But all three agree, good companies will still have little or no problem this year, if the trend continues. The US-based venture fund raised $128 billion last year alone and there’s a lot of powder to deploy. It will rely much more heavily on business economics than the company’s 2021 growth story.
“I think for the top 5% or 10% of companies, nothing has changed from last year,” Goldberg says. “If you are an exceptional business you are unaffected by macro conditions.”
