Fundraising in 2022: Where We Are & Where We're Going
Tomasz TunguzVenture Capitalist at Redpoint If you were forwarded this newsletter, and you'd like to receive it in the future, subscribe here. Fundraising in 2022: Where We Are & Where We're Going
Last week, I presented an overview of the fundraising market at the Traction Conference in Vancouver. The slides are embedded above & linked here. My brief narrative of the slides follows The current state of affairs arose as a result of the Global Financial Crisis. Since 2008, the US experienced an unabated 12 year bull market fueled by four waves of money printing which increased US money supply by 30%+. This experiment culminated with Covid. The supply chain shocks combined with many more dollars fueled inflation, which the Fed is fighting by raising rates. Higher rates depress valuations of high growth companies & reduce corporate spend, slowing the economy. Public technology companies fell 60-70% in valuation. Founders feel this impact in the public markets, expecting a 30% reduction in ARR this year & an uncertain fundraising market. Surveyed founders expected a 10% decline in valuations. If public comps apply to private companies, then the market should expect a ~70% reduction in private valuations. Venture capitalists have continued to invest at similar prices & similar round sizes in the most sought after companies. But round volumes have fallen by at least 20% & likely much more. $220b in dry powder (dollars VCs have raised but not yet invested) will buoy valuations higher than expected. In addition, private market dynamics play also invigorate this market. Private companies are marked to market every 12-18 months rather than every day. Similar recessions (1940s, 1970s, 1980s, 1990s) have lasted 14 months on average & the stock market begins its recovery 154 days before the end of the recession. If history rhymes, we should see six months to determine we’re in a recession (2 quarters of negative GDP growth), two months of sideways stock trading, then the recovery begins. Some startups may escape a harsh repricing by virtue of their runway leaping from peak to ascent, avoiding the trough. Single auction winners also buttress the market. A single player sets the price for a startup round, rather than a collection of buyers & sellers in the public markets. Market prices accelerate faster with single-winner auctions. Publics are down 70%. Private data suggests a steady market but it’s a mirage. I think the market will settle in Q3/Q4 at a 40-60% decline to Q1 2022 & volumes will increase again in early 2023. Let’s see if any of these predictions hold! |
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