Are startups really in danger of suffering a protracted, painful slowdown?
With half the year now behind us, the gathering clouds for startups around the world don’t appear to have broken into storms, leaving us wondering if the market is really that bad today for venture fundraising, and therefore startup health.
There are other positive factors to consider: Employment growth in the critical U.S. market remains strong, the value of software stocks may have bottomed out, many startups are hitting plan and there’s plenty of dry powder in the market looking for a deal. Could we be set up for an H2 2022 startup recovery?
We’re not ready to make a formal prediction, but data and certain market dynamics could put startups in a pretty OK position in the back half of the year. Let’s talk about the bull case for startups for the rest of 2022.
A recovery?
According to PitchBook data that TechCrunch discussed earlier in the week, we are seeing venture capital activity slow from a hyperactive 2021. This was expected.
But it also reported that American venture capitalists alone have raised more than $120 billion in 2022 thus far. That puts Yankee private-market capital allocators on pace to smash the $138.9 billion they raised last year and utterly crush the $85.4 billion raised in 2020, a number that, while a record at the time, pales compared to the recent venture capital fundraising pace.
With more than $120 billion raised in the first half of the year, venture capitalists may have more dry powder than ever before heading into the last two quarters of 2022. You know what that means? Lots of capital to put to work on a countdown timer to deployment (venture capital funds have a constrained lifecycle).
What’s more, there is reason to believe that some VCs are currently simply not doing anything, meaning that there will be even more capital available later in the year than we’d otherwise anticipate. FirstMark Capital’s Matt Turck said the following this week, for example:
Most VCs I know are saying “September” for when they’re going to start being truly active again, hoping for a new normal in terms of deal terms. But what happens to valuations if all investors really come back to the market at the same time?
— Matt Turck (@mattturck) July 7, 2022
Lots of capital, a self-enforced waiting period and venture investors coming back to the market at the same time, en masse? Sounds like a recipe for, well, shoot, competitive funding rounds coming back?
The corollary to the old venture chestnut that good companies can always raise is this: If there are no good companies, no one will be able to raise. Simply knowing that there will be capital available doesn’t necessarily mean that deals will get done. But we keep circling back to what Index Ventures partner Mike Volpi told us last month — that around three-quarters of startups are meeting plan. That implies that there should be a good number of startups in late Q3 and early Q4 ready to take on more capital.
Doubly so, frankly, with some startups expected to hold off on fundraising until the market’s mood improves. Perhaps everyone comes back to the table in September? If so, we could see a flurry of funding rounds that turn the tide and slow, if not halt, quarter-on-quarter declines in venture capital activity.
Yeah, but…
It’s not hard to find some reasons for optimism or pessimism, string them together and create a case for something happening that most certainly won’t. That’s essentially the day job of major newspaper op-ed writers. To avoid that, TechCrunch went back through historical layoff data at startups to see what we can infer — and possibly push back against our sunny take.
What does that data indicate? Per Layoffs.FYI, the number of individuals that startups laid off in June was down from May, albeit across a greater number of companies. And July data indicates that we will see far fewer layoffs — and companies laying off staff — than in the prior two months. We may already be post-peak in terms of startup bleeding, which is bullish.
That said, there are some reasons for doubt that we’re on the cusp of a startup recovery. A strong labor market in the United States is good for workers, but not so good for folks who want to keep interest rates (the price of money) low. Rates will rise in the coming months, perhaps putting new pressure on more pricey assets, like tech stocks.
And then there’s the perspective that some VCs have that a Q3 timeline is simply too quick. Redpoint’s Jason Warner said the following as the week came to a close:
Many VCs are waiting for valuations to stabilize before investing. If people are sitting out, prob Q4 people start re-entering. This is more true for later growth rounds than early but early valuations are impacted last & those seemingly haven't stabilized just yet (from friends)
— Jason Warner (@jasoncwarner) July 8, 2022
By that timeline, we might be in for an even longer period in which startup fundraising — and therefore spending and, to a related degree, growth — will be depressed.
Still, it never hurts to see where we might wind up if the stars align.
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