Still dancing: VC funding remains strong in 2022

July 2022 | FEATURE | FINANCE & INVESTMENT

Financier Worldwide Magazine

July 2022 Issue

2021 was a notable year for venture capital (VC) funding. According to Factset, investments rose in every major region last year, compared to 2020. North America and Europe saw investment activity more than double. In North America, every quarter in 2021 doubled levels in the same quarter of the 2020 quarter, resulting in a 131 percent increase in total VC investment value for the full year. Meanwhile, European investment grew 135 percent over 2020.

In Asia, VC investment rose 61.5 percent compared to 2020 – far less than in North America and Europe. This divergence at least in part came down to timing: Asia was the first region to see rapid growth and exceed pre-pandemic levels in late 2020. Throughout 2021, Asia’s quarter-over-quarter investments remained at levels consistent with the fourth quarter of 2020, resulting in a lower annual growth rate.

Globally, the number of VC investments did not increase at the same rate as aggregate value. The increase in value was due to increasingly larger investments made into existing portfolio companies.

After a strong 2021, global VC investment cooled somewhat in the first quarter of this year, despite the number of unicorn companies reaching a new high. Global VC funding reached $143.9bn, across 8835 deals, in the first quarter, down 19 percent from the previous quarter – although Europe did buck the trend.

However, despite the overall slowdown, Q1 2022 was still the fourth-largest quarter for funding on record, with the US alone accounting for nearly half of total funding, including some of the biggest deals.

“The outlook for the VC industry in 2022 appears strong. More venture funds were raised in 2021 and more start-ups received funding than ever before.”

The outlook for the VC industry in 2022 appears strong. More venture funds were raised in 2021 and more start-ups received funding than ever before.

The tech space has seen considerable activity. Tech investors have been extremely active over the past two years, especially in the US, despite the coronavirus (COVID-19) pandemic and other challenges.

Understandably, given the uncertainty caused by the pandemic, VCs took steps to mitigate its impact. “Early in the pandemic, many VCs first moved to shore up the positions of their promising portfolio companies by offering bridge rounds and follow-on financing rounds, often sooner than might otherwise be expected,” explains Alexander Lazar, a partner at Sheppard Mullin. “Due to the ongoing conflict in Ukraine and signs of global economic challenges, we have seen some of this again recently, though not yet with the same intensity as during the first several months of the pandemic in 2020.

“Companies that will need to raise funds this year and are currently considering financing rounds from new investors may wish to move quickly to lock in financing before investors shift their focus and resources to their existing portfolio companies in the event economic conditions deteriorate,” he adds.

According to Pitchbook, the first quarter of 2022 saw US VCs raise more capital commitments for new funds than in the entirety of 2019. But those new funds did not translate into more investments into start-ups. Instead, global VC investment fell sharply in the first quarter, down from record highs the year before.

The global economy is facing numerous challenges – including the looming threat of inflation, the war in Ukraine, a poor IPO market and the chance of recession – which are certainly influencing VC decisions and their assessment of the investment landscape.

Going forward, VC funding is expected to pour into industries such as biotech and cryptocurrency. Biotech and pharma funding activity exploded in 2021, increasing to a record $36.3bn as of 1 December 2021, according to Pitchbook. Equally, crypto start-ups in the US raised a record amount in the first quarter of this year, surpassing $6bn, according to Quartz.

This investment in the cryptocurrency industry is driving participation from new types of investors, according to Mr Lazar. “In particular, we are seeing increased activity among decentralised autonomous organisations (DAOs), both as recipients of investments and as investors. DAOs are typically governed by voting among their token holders submitting proposals and voting on those proposals. As time has passed over the last few years, token ownership among many DAOs has become more distributed. In many case this has led to more democratised, and less institutional, token holder bases. Many DAOs are also at least partially mission focused.

“DAOs with governance bases that are both mission-focused and less institutional may be more likely to pursue investment strategies that are less about return on investment and more directed toward areas such as public goods and social entrepreneurship,” he continues. “We are watching to see whether this will become a trend and what impact it may have on investment in DAOs by traditional and institutional investors.”

Though uncertainty is spreading through the global economy, VC investment is expected to remain relatively steady as 2022 progresses. To be sure, there is a significant amount of dry powder in the industry. While cooler funding levels in the first half of the year suggest that conditions are shifting away from the record-setting peaks of 2021, VC investment is unlikely to evaporate.

Richard Summerfield