VC Trends 2022: Deal Dynamics And Lessons From Past Tech Downturns

As a financial partner to medical and technology companies and investors for the past four decades, SVB has provided support and guidance through various business cycles. Sunita Patel, Director of Business Development at SVB, who has over 25 years of experience working with companies and investors in the innovation economy, shares trends from SVB's latest State of the Markets report, insights into current market conditions and how how companies and investors can prepare. for the next one.

The startup investment landscape has changed in 2022

The pace of venture capital investment and late-stage technology valuations is slowing for most of 2022. However, early-stage investment activity is strong as venture capital (VC) funds turn their attention to early-stage companies as they wait for public information. market. turbulence will decrease. In the United States, the first half of 2022 was the busiest in terms of origination activity, with more than 2,900 deals closed.

Against this backdrop, investors are asking portfolio companies to cut costs and look for other ways to expand their presence. We see companies refocusing on their core business and cutting costs such as payroll, advertising and cloud computing. As part of the expansion path, many smart companies are seeking non-equity financing, including debt financing, even those that have just raised equity capital.

We have learned important lessons from previous business cycles

Every recession is unique, but for more than four decades, we've worked with founders, investors and executives through multiple business cycles. From our perspective, today's innovative companies are in a better position to weather the downturn than in past phases. First, the current field is significantly larger. Since 2000, the digital economy has grown twice as fast as the US as a whole, and technology is embedded in everything we do. Second, record venture capital investments over the past two years have strengthened corporate balance sheets. Even with these investments, PE and VC have record levels of dry powder ($269 billion in 1H 2022) waiting to be built, and we expect them to return once the safeguards are in place. estimates stabilize.

This will likely take some time to implement, and many companies are undergoing a complete overhaul of their operations and business strategies to address the new constraints. Use this time to identify your company's strengths and find competitive opportunities. For example, some of the costs of starting and expanding a business are reduced, particularly the cost of talented employees. The pandemic's lessons about what motivates employees, combined with the exodus from big tech companies, means more people may be willing to join a new, smaller, albeit risky, company. Make an offer to someone you couldn't reach before. A recession can provide an opportunity to build a stronger team, focus on market needs, and possibly create entirely new categories. The global recession of 2007-2009 spawned Airbnb and Uber.

Act this recession

Navigating through a recession is new to many. At times like these, we advise our clients to prioritize, cut costs and prepare contingency plans to create a realistic and flexible short-term action plan and then act with discipline.

In addition to getting your financial house in order, expand your networks to increase knowledge, perspective, and access to opportunities. The most valuable relationships are often built during the most difficult times. Ask your trusted colleagues for advice and use their contacts. Open communication with businesses, lenders and investors to help you weigh the pros and cons of your options. This includes consulting with people who know your business or portfolio companies and can provide guidance on unknown scenarios. Today's lenders, for example, want to know how a company is handling inflationary pressures and whether it intends to weather high interest rates.

Future growth opportunities

Innovation is complex in all circumstances and never static. As valuations decline, opportunities increase for companies looking to grow through acquisitions, as well as those acquired freeing up entrepreneurs to move on and pursue their next big ideas. History shows us that tough times can inspire forward-thinking founders and investors while allowing for new funding options. A Crunchbase study of the 2008 financial crisis shows that while funding dried up for both early- and late-stage companies, seed funding helped shape a new company then and launch a distinct strategic investment that is still known today.

Indeed, fall can be a good time for founders with solid business plans and capital to start a business. As startups cut costs, including layoffs, access to talent becomes easier. In addition, innovators who capitalized on the record exit environment in 2021 may have significant capital to launch a startup or become angel investors to support others, or both.

Because we are optimistic about innovation

When stock exposure and corporate values ​​decline, disruptions are a concern, and the innovation sector tends to experience more pronounced short-term fluctuations than the economy as a whole. It is also the time when many new ideas are born. And in the long run, the innovation economy outperforms other sectors of the economy. The world is hungry for innovation, and that is not changing. Fundamentals remain strong, which explains our confidence that the overall economy will be even stronger going forward.

Learn more about the key trends changing the business landscape in the SVB Markets report.

The views expressed in this column are solely the author's and do not represent the views of SVB Financial Group, Silicon Valley Bank or their affiliates. This material, including but not limited to the statistical information contained therein, is provided for informational purposes only. The material is based in part on information obtained from third-party sources that we believe to be reliable but have not been independently verified; and as such, we do not guarantee that the information is accurate or complete. Appropriate and specific professional advice should be obtained before making any investment or other decision. Silicon Valley Bank is not responsible for any costs, claims or damages arising from the use of this material.

All non-SVB companies listed in this document, represented by the various statistics, opinions, analyzes and ideas presented in this document, are independent third parties and are not affiliated with SVB Financial Group.

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