Tightening the Purse Strings: Why VC Investment Has Slowed
2021 was a record-breaking year for venture capital investment. A surge of new consumer and business needs drove innovation, digital transformation, and eager investors, leading to a volume of successfully funded companies never seen before. It makes sense that 2022, in comparison, could seem sluggish. But after a slower-than-expected start to VC investment in Q1, it seems that funding has dropped off even further. Is this simply due to global volatility caused by factors such as the war in Europe, or is there something deeper at work? More importantly, how can hopeful startups find the funding they need to move forward?
Investors Cautious in a Volatile Market
In November 2021, online real estate “re-imaginer” Zillow announced that it was ditching its iBuying solution, Zillow Offers. Despite the digital offering accounting for 68% of the company’s revenue in the final quarter of 2021, the service was costing more to run than it was bringing in, essentially becoming a money pit for the company. Other proptech-involved companies like Opendoor and Redfin lost value on their stocks as Zillow cited the risk of upscaling their venture. Could investors be seeing this as a cautionary tale and avoiding investing in what they might see as history repeating?
Some investors have definitely pulled the plug on their tech funding. SoftBank reported losses of $20.5 billion and advised it may cut funding for startups by up to 75%. After much successful funding of fintech and health and lifestyle ventures in 2021, Lightspeed has also announced that it will be focusing on its existing portfolio — shorthand for cutting the funding to startups. VC investment companies appear to be watching their funds more carefully than ever, perhaps in reaction to the risk of higher interest rates.
The Impact of Inflation
Inflation in the United States is at a 40-year high, and around the globe, other countries are also experiencing soaring inflation rates. Various factors have had a “pile-on” effect, including steadily climbing energy prices, fluctuating gasoline costs, and an uncertain property market. Many of the price rises can be attributed to the Russian invasion of Ukraine, which has caused supply chains to crumble.
Investors take different approaches toward high levels of inflation. Some may see it as a sign that deflation and a subsequent recession are approaching and prepare accordingly, investing only in assets that don’t lose value easily. Others may continue with VC investment, but only on proven cash cows, rather than taking risks on new ventures — as we’ve seen with some of the big VC companies drawing startup funding back dramatically.
Funding Fatigue Impacts Startups
VC companies that invested wildly in 2021 may be suffering from funding fatigue, cautiously hedging their bets — and their funds — to ensure they don’t suffer losses in a fluctuating marketplace. Obviously, this can’t help but have a negative impact on startups, not just because they have fewer opportunities to get the funding they need, but because they may be less bold and take fewer risks themselves in an attempt to cut costs any way they can.
Seed and series A funding stage companies might feel that there is no way to get the funding they need, but of course, that’s not the case at all. The overall picture might be bleak, but there are still some promising details to focus on. Fintech companies are starting to see the benefit of more engaged private investors, while proptech has had a sudden return to form with funding amounts that could set record values in 2022.
Final Word
It’s true that there’s less money in the pot this year for startups, but that shouldn’t stop you from making the impact you know you’re capable of. With a strong and consistent brand message from the outset, and help from an experienced freelance marketing executive, you can find investors who are as passionate about your product or service as you are. Don’t disappear in 2022. Get the marketing expertise you need to stand out from the crowd and win over even the most cautious of VC investors. Book a 15-minute introductory call Arch Collective and find out how to cut through the noise.
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