What do founders need to know about the funding landscape in 2023
In 2022 we felt the post-covid aftershocks, public market adjustments, and the impact of the Russian Invasion of Ukraine. What is 2023 likely to hold?
Whilst I’m going to spend a lot of this article looking forward, Before we start oggling at the Crystal Ball — I want to reflect on where are we today, and where have we come from.
2022 saw a drop in fundraising activity
2022 saw a big drop in fundraising activity than 2021…but it’s worth remembering it was still a huge year compared to 2019 and 20202.
Whilst valuations started to drop following the 2021 Thanksgiving sell-off, fundraising activity persisted in Q1 before dropping in Q2 and by the time Atomico’s State of European Tech was released in Q4, total investment was down 48% compared to 2021.
Almost 80% of Founders found it harder to fundraise in 2022 than 2021.
However, when we compare that to the 2020 and 2019 data, it’s clear that there is still very much a fundraising market out there — it just hasn’t grown at the break neck speed we saw as we accelerated out of the pandemic.
Many commentators believe the worst is now behind us, or at least, investors have already factored it in, are looking to the future and seeking opportunities which will accelerate out of this current malaise.
Valuations took a battering
As is always the case, as public markets get hit, it impacts exit valuations, and therefore the entry valuations of those closet to exit — late stage investments. Inevitably though, this trickles down to the earliest stages where we know its been a tough fundraising marketing.
Quoting directly from Pitchbook: “The top decile of late-stage startups by valuation have seen their price plummet to $680 million in Q3 2022.
That valuation represents a 54% decrease from a pre-money valuation of $1.48 billion garnered by the top 10% of late-stage deals in Q3 2021. The dramatic decline indicates that prices of the best-of-breed late-stage private companies are coming closer in line with their publicly traded counterparts. Stocks of formerly VC-backed companies have cratered by 69% since a year ago, according to the PitchBook’s VC-backed IPO Index.”
Whilst early stage start ups didnt’ feel the full 54% decrease in valuation — they didn feel the pressure in terms of valuations and terms.
VCs have got plenty of capital to deploy but there will be plenty of competition for it
However, the silver lining to all of this, is that the capital that wasn’t deployed last year still needs to be deployed by VCs at least and they are sitting on huge amounts of dry powder.
At the end of 2021, the latest period for which comprehensive and reliable data is available, European VCs sat on dry powder totalling $84B — the highest amount on record and a 2.3x increase on the level of 2017.
Since then, 2022 brought both strong fundraising activity and overall slower deployment — so in all likelihood, this number may have increased
So, we know VCs have the capital — they are just being more cautious about deploying it, and so building trust with VCs is more critical than ever.
End of growth at all costs — the focus will remain on sustainable metrics
So, if we pull together just a few of these phenomenon — we have resilient levels of fundraising, but at lower valuations and yet, VCs are sitting on ever increasing amounts of Dry Powder. Clearly risk aversity and enhanced diligence and are pervading the investment process, both by VCs into start ups, and by LPs into VCs — so metrics are key.
Where as 2021 demonstrated how cheap capital was able to raise (almost) all ships, 2022 has demonstrated how and why start ups need to focus on core, sustainable metrics which demonstrate how they are building long term value propositions.
As investors get more clarity around the economic outlook, that focus is only going to intensify as they see some of those hyper focused, metric driven start ups start to break out! So if you’re not one of those laser focused break throughs, now is the time to identify those 3 metric you are going to build your business around this year, explore how they’ll get you to cashflow positive at best, or at least sustainable growth — then we need to get message out to investors
Sustainability concerns persist — at least in Europe
Amongst all of the investment stages and themes, it was clear from the data that impact driven start ups held their own they best. Hot off a lot of the ‘Build Back Better’ and COP 27 inspired global sustainability initiatives, investors and founders a like know the demand for innovation to tackle the task at hand.
Interestingly, investment levels on an annualised basis in Europe look set to come very close to matching 2021’s record-breaking amounts. By contrast, investment amounts in North America and Asia decreased by around 40% and 45% in 2022 compared to last year, respectively.
There is a huge talent opportunity
Around the world, the tech sector has been hit by a wave of layoffs that shows no signs of slowing down, evidently as a result of the ongoing crisis and market downturn.
Globally, more than 200,000 tech workers lost their jobs at more than 1,000 companies in the past year, according to Layoffs Tracker.
That includes more than 14,000 tech employees of Europe-headquartered tech companies losing their jobs, representing 7% of all tech employee layoffs globally, but it does not include those that haven’t been ‘announced’ with a number of staff reductions.
As the data seems to indicate, we may have not seen the worst just yet.
We don’t know when sentiment will return — play nice, and play numbers, play for opportunities
Most financial market observers expect any low points in economic activity, and high points in interest rates, to be felt this year and that by Q3, we should be firmly focusing on how we can accelerate out of any slowdown.
So where does this leave start ups today:
- Focus on metrics: Focus on your metrics and charting a path to sustainability and cashflow positivity
- Overcommunicate: Communicate these metrics clearly to VCs to ensure you’re occupying headspace with them — you know they are taking longer to make decisions so stay with them whilst they do
- Investors will take their time:All investors are recalibrating their investment frameworks, and the terms are firmly in their favour so the best thing founders can do is to speak to more investors to both improve your chances of success, and getting the terms you want, even if your expectations have dropped considerable from where we were 12 months ago.
- Skate to where the puck will be: Whilst prudence is definitely a watch word — don’t forget to keep an eye out for opportunities. Sustainability initiatives and imperatives are not going away, and Talent is flooding the market — so ask yourself how you can not only capitalise on those trends in 2023, but how can you best prepare for 2024.
IF you want to learn how more about these strategies, and how to get in front of investors with more impact and better results in 2023 — you need to attend my Fundraising Strategies Webinar on Tuesday 24th January — you can sign up here!
How I support Climate Tech Fofounders?
I am a prolific and impact-focused venture capital investor and serial founder as well as a start-up sustainability and fundraising coach. I work with dozens of sustainability and cleantech founders and investors.
VC Investor: I am a professional impact investor at Vala Capital, where I lead their UK-orientated sustainability fund. I sit on a number of boards and advise countless more.
Coach: I’m a Venture and Leadership Coach to sustainability CEOs around the world and coaches clients from the Far East, Europe and North America in sectors as diverse as Hydrogen, Circularity, BatteryTech, Retail, Hospitality and Energy Storage, WaterTech and Media.
VC Adviser: I’m also an adviser and mentor to Third Derivative in the US, and Bethnal Green Ventures in the UK, as well as being on the steering committee at VentureESG.
Serial-Founder: I am a serial founder and have raised multiple investment rounds from notable VC investors including Anthemis and Axa Venture Partners for my start ups Attis Ventures and Goji Investments
Corporate Finance: Prior to founding Goji, I worked for one of the UK’s most prolific corporate finance firms, where I advised on several $bn of transactions across public and private markets for some of the world’s leading investment groups.
