Less Venture Capital (VC) Funding Making the Rounds

Businesses of all types have faced challenge after challenge over the past few years as we’ve segued from a pandemic into record inflation and the looming possibility of a recession. From remote and hybrid work to never-ending price adjustments and surcharges, we’ve all been forced to embrace change whether we want to or not.

Unsurprisingly, startups and the world of venture capital (VC) are not immune. As interest rates continue to climb and inflation remains at levels not seen in nearly a half century, the appetite for investment in projects perceived as ‘riskier’ is curbed.

What’s going on with VC, and what does history tell us? Here’s an overview:

The tech sector, of course, is disproportionately affected by VC, and tech stocks have led the downward spiral in the markets over the first five months of 2022. That state of affairs has VC firms circling the wagons to some degree, telling their portfolio companies to put the brakes on hiring and marketing, and to plan for more cash runway than in boom times.

That’s a dramatic change from a year ago, when pre-IPO valuations were huge, with some startups realizing multiples of 100 times revenue. The National Venture Capital Association notes that venture funding reached $332.8 billion in 2021, a sevenfold increase over the past decade.

Unlike the pandemic, which featured a sharp drop-off and an equally dramatic recovery, the classic V-shape, experts predict a much longer haul this time. The government aggressively poured money into the economy to spur the recovery from COVID, and those tools have largely been exhausted. And a look at Series A, B and C funding through the pandemic years reveals no significant decline. So in this case a more accurate predictor of the future might be the 2008 financial crisis.

According to Crunchbase, Series A, B and C funding dropped from 40 to 47 percent in 2009 compared to the prior year, and did not return to 2007 levels until 2011. That’s a significant amount of money, and a long, slow return to normal, and the current consensus seems to favor that scenario now.

Interestingly, though, at that same time seed funding emerged as an asset class and showed growth during and after the Great Recession. So while early- and late-stage funding was severely impacted, new company formation continued at a growing rate through those years and beyond in a more or less unbroken upward curve.

The impact of the current economy on well-established firms has been evident in the first half of 2022 as names like Facebook, Uber, Lyft, Peloton and Cameo have either slowed hiring or announced personnel cuts. In one extreme example, the cloud software vendor Lacework announced staff cuts six months after receiving an $8.3 billion valuation from investors (source: CNBC). No one wants to see jobs lost, but a potential silver lining here is an easing of the pressure of a very tight employment market, especially in the tech sector, where there have sometimes been two open positions for every available hire.

In the end, technological disruption and innovation will continue. VC investors remain optimistic about the long haul, but startups seeking funding should be prepared to answer more questions, and to present a stronger case to investors, than ever before. And established companies looking for A, B or C funding are likely to have to make some tough decisions in the near term.