Now that the downturn is upon us, is it still the best time in history to build a business? Industry titans and Antler Board members James Anderson and Sheila Patel tackle crucial questions about the current markets, what they mean for founders and investors, and whether the golden age of innovation will persist through these rough seas.
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July 25, 2022
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Looking at the current state of the markets and world, many of you are likely thinking: how did we get to this point?
Over the last 20 years, low-cost and high-impact technologies—like cloud computing and SaaS—have fast-forwarded the disruption of every industry on earth. Founders have been able to scale their startups and reach enormous global audiences faster than ever before with much lower initial capital investments. Meanwhile, the fourth industrial revolution has been gathering steam, with AI, robotics, genomics, the Internet of Things, quantum computing, blockchain and more becoming a bigger and bigger part of our lives. Entrepreneurs everywhere have had an immense opportunity to totally reimagine business models as we’ve known them.
Just 12 months ago, this tidal wave of disruption reshaping every industry led to record levels of venture capital (VC) funding globally. A record number of unicorns were being born. In just eight years the world went from 37 cities boasting one or more unicorns to 170 cities. The globalization of VC was upon us. It was thrilling to see new tech ecosystems springing to life, new industries being created, and a newfound recognition across the industry that great founders can come from anywhere.
There seemed to be so much capital available for founders that they started to seek out VCs not only for their capital but also for their community and value alignment. Non-traditional investors like hedge funds and corporates started competing with VCs, particularly at a later stage and made up around 80% of deal value. Even the most conservative consultants were advising their clients to allocate more to VC.
But after this prolonged period of strong growth, myriad factors—including rising inflation, interest rate rises, and geopolitical issues—have contributed to the market downturn that is on track to culminate in a global recession. The S&P 500 year-to-date performance looks set to be one of the worst years on record. This downturn has hit technology stocks particularly hard, with trillions of dollars in lost value and large-scale layoffs. It is no wonder that investor confidence in both public and private markets has been dented.
Has the current environment dampened entrepreneurs’ willingness and ability to disrupt? Has the downturn really destabilized investor confidence? What does that mean for innovation? We sat down with two industry titans and Antler Board members—James Anderson and Sheila Patel—to tackle these questions. Watch the replay of our discussion above.
Some of the best ideas are born of adversity. We're about to face some very adverse times and companies, innovators, and founders that survive through more adverse times build stronger enterprises, come up with ideas that really are solutions to problems that have been begging to be solved.
— SHEILA PATEL, ANTLER BOARD CO-CHAIR
We share Sheila and James’s relentless optimism. The past offers proof that crises and shocks do not deter the most determined and visionary founders. Instead, times like these create unique opportunities for paradigm shifts. Some of the most impactful companies of our age have risen from the ashes of distressed periods. Google, SalesForce, and Facebook were started during periods of financial stress. Uber, Venmo, Slack, Airbnb, and Pinterest all emerged from the 2008 financial crisis. The greatest companies of the next decade will likely also be started amidst today’s challenging conditions. Those that create sustainable value through hard work and focus will stand apart from the rest.
I think the truly great founders will make it their time. I think that most of our task is still engaged in trying to identify those truly great and distinctive founders. If we get this right…then the opportunities seem to me to be way greater than over the course of the last 35 to 40 years.
— JAMES ANDERSON, ANTLER BOARD MEMBER
VC-backed startups have an unprecedented opportunity to address a multitude of global issues and build a better future for all. To most effectively do this, VCs can adapt their model to ensure they are supporting their founders in the right way, setting strong and resilient foundations at the earliest point to build sustainable businesses, and upholding their fiduciary duty to investors.
Has the case for allocating to VC changed?
With so much market volatility and pessimism, has the case for investing in VC changed? Let’s look at some key considerations for investors thinking about their VC allocations.
2022 VC activity will be higher than pre-pandemic levels
VC activity has slowed down, but this year is still going to be higher than pre-pandemic levels.
Global venture investment last year totaled US$643 billion, compared to US$335 billion for 2020—marking 92% growth year over year. Average global deal size is still higher than pre-pandemic.
Megarounds have seen a decrease of 31% in funding in Q2 2022 hitting its lowest level since 2020.
Global late-stage median deal size is down 30% from peak in 2021 and yet it is still higher than 2020.
2021 was an exceptional year for VC activity. In fact, 27% more deals closed than 2020. The amount of capital also increased with each quarter raising more than the last. This was in part due to an increased efficiency of meetings taking place online which made the due diligence process easier and thus more deals were done. This hasn’t necessarily fostered good behavior across the industry.
The rise of VCs who apply indexation to investing has proven to decrease return dispersion, but it did overlook founder and portfolio companies’ need for support and guidance to maximize their probability of success.
Given the state of the public markets, we expect later-stage investors to slow the pace of their deal making compared to 2021. We also expect that IPO and SPAC activity will continue to slow as companies wait for a better time to go public.
Early-stage companies did not experience the same valuation exuberance seen at later stage rounds during 2021, despite a clear trend of established VCs investing earlier and earlier. This may be the reason why the valuations have been less impacted by the downturn.
The unicorn boom continues
The rate of new unicorn births has slowed but is still flourishing—85 emerged over the last quarter compared to 148 in the same quarter last year.
Despite the pullback in valuations, Q1 2022 saw the birth of 113 new unicorns globally which was two less than in Q1 2021.
In January 2022, there were 51 decacorns in existence.
As at Q2 2022 this year, there were 1,070 unicorns.
There has been a notable drop in IPO and SPAC exits which perhaps continues the trend of more companies staying private for longer.
Technological advancements are still happening and many of the applications of new technologies are yet to be discovered. We see investment opportunities ranging from decarbonization technology and agricultural techniques to respond to food scarcity to psychedelic research for mental health disorders. Founders are trying to fix the problems we face in the world with innovation and technology.
Every cycle of innovation needs a moment of rationalization.
— SHEILA PATEL, ANTLER BOARD CO-CHAIR
Tempered valuations as a healthy normalization
Consider global median deal size by stage.
75% of VC-backed startups were valued at $1 billion at IPO in 2021.
2021 was the year that VC garnered much investor interest and capital supply across the industry increased dramatically. This gathered media attention, which in turn fueled greater interest in startups and VC, and valuations skyrocketed. Less reported was the disappointment post-IPO when these valuations subsided. Rising unrealized (the key word here) valuations had been supporting returns in the VC industry, with the average being around 50% in 2021. However, valuation growth is not a proxy for actual revenue or profitability growth.
The public market volatility will flow into private markets but it could lead to a healthy normalization of deal terms and valuations that are well within historical levels and experienced investor expectations.
More geographic diversity with early-stage investors
The globalization of VC validated Antler’s view that great founders can come from anywhere. 2021 was the year that investors recognized this as well. Investor flows into VC funds were increasingly from international asset allocators rather than domestic investors. Investors realized that to achieve diversification, they needed to look beyond Silicon Valley.
A trend of investors funding international startups has pulled back a little—most noticeably from US and Asian investors in EMEA.
According to dealroom.co early-stage investors represent the most geographic diversification by flows.
We are keeping our sights firmly trained on the future, supporting our founders and investors along the way. Despite the market backdrop, we are optimistic and strongly believe the golden age of innovation will prevail.
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