Global funding for startups has fallen 23% since the first quarter of 2022 according to a report form CB Insights, with $108.5 billion invested over 7,651 deals.
This is the largest quarterly percentage drop in deals in a decade, and the second largest drop in funding. However, the number of deals and funding haven’t dropped below 2020 numbers, highlighting the fact that 2021 was a record year for venture capital funding. The steep drop was somewhat expected and is balanced out with the shock UK economic growth of 0.5% announced last week. Director of Economic Statistics at the ONS, Darren Morgan, has stated the UK economy has “rebounded” largely across sectors such as construction, services, and manufacturing. Chris Biggs, CEO of accounting and consultancy firm, Theta Global Advisors, explains that the combination of a more positive outlook and company valuations that have plummeted, could provide a wealth of opportunities for deep-pocketed private investors.
An analysis from PwC has even highlighted that deals done during times of economic downturn often provide buyers with better returns, meaning that there could be a strong flurry of activity in the second half of the year, even if the growth in the economy progresses to a plateau or slight fall. There has also been an increasing number of public-to-private transactions so far in 2022, further highlighting the opportunities that can be found in the current market. Ultimately, during times of high inflation, investors do not want to be sitting on their cash. This means that despite current market uncertainty, there will continue to be activity from VC houses and institutional investors – whether that is through acquisitions or funding.
However, there has been a notable shift in the market away from late-stage start ups with high cash burn, as a much greater emphasis is now being placed on sustainability. Therefore, it is the early-stage start ups with this ethos in mind that stand in better stead amidst this challenging environment. In order for a deal or fundraising round to go smoothly, financial advisors are key in helping to facilitate the process and gain the best terms for the company involved.
According to data from Deloitte, nearly two-thirds (63%) of businesses report that the success of their M&A was moderately or highly dependent on a successful transformation – often led by a senior level and external advisor. In order for start-ups to take advantage of the exit opportunities, Chris Biggs outlines the importance of bringing an experienced CFO or COO – on an interim basis – to implement transformational changes to working capital, reorganisation, increasing cost reduction, and legal entity restructuring to secure the best deal possible.
Chris Biggs, CEO & Founder of Theta Global Advisors, explained how companies need to be agile in order to complete an IPO or M&A in the current market:
“There has been a drop in global funding of startups since the first quarter of 2022, and continuous rising interest rates have also caused a significant shift in the deals market. That’s why we’re trying to encourage companies to get themselves as ready as quickly possible. Because, if you have that little opportunity that comes up in six months’ time, you must take it and not push it out to 12 months. In an uncertain market you need to be ready to take the chance when it arises, as there may not be many more on the horizon – especially if the cash flow runway is limited.
“A key part of that is enlisting the help of experienced advisors that can help you get your business’ shop window in order, so to speak. This early and expert preparation gives companies the greatest chance of getting a deal, IPO or fundraise over the line.
“I think the private equity houses are looking for opportunities to invest in new companies, because it’s that first phase where you can start to invest and grow it – that’s where you can add the most value and see your overall investment grow. So, the problem is, if it’s a company they have already invested in for three, four or even five years they have already gone through that cycle. So, if they invest more in it, they are going to get smaller returns for what they invest in.
“A lot of the PE houses would prefer to invest in companies where there is greater growth potential – i.e. that first round of funding that companies do. I think we are possibly moving into the environment where funding of private equity is going to become more common than funding through classic banks. Because these private equity houses need to get the cash out.”