VC funding takes a hit. This is how your business can cope with it.
Updated: Jun 2
2021 was a historical first for venture capital funding, with more funds raised globally than ever before. However, after a historic boom in VC funding, investors are concerned that the market is drying up.
A decline in bets on startups led to a 27% drop in investments globally by private equity and venture capital funds in April 2022 at $5.5 billion, as per a report by IVCA and EY. According to data shared by market intelligence firm CB Insights, venture funding to India-based startups dropped to $3.6 billion in Q2 2022 so far from $8 billion in the January-March quarter and over $10 billion a year back. The data also showed that venture funding slowed for the first time sequentially in the January-March quarter of this year since the October-December quarter of 2020.
Startups in India have fired over 5,000 employees so far this year, according to data compiled by Moneycontrol. With VC funding drying up, companies will now be held to a higher standard of profitability. This adds a layer of stress and much more prudent financial management right from the start of the company and not a growth friendly approach erstwhile followed.
What Has Caused the Downward-Trending Market?
The global economy is complex, and there is no single event responsible for the reduction in venture capital funding; multiple drivers have impacted the market. With that said, here are three of the main reasons for this downward-trending market: global inflation, the Ukraine invasion, and the pandemic.
A primary cause of the lack of venture capital is global inflation, or rather the act of central banks trying to combat the rising economic prices. With global central banks adopting a hawkish stance, Banks and other financial institutions across the globe have raised their interest rates to pull money back from the system. In turn, this reduces global liquidity and the amount of money in circulation for riskier products like VC equity. Higher interest rates have seen investors shift their portfolio allocations to fixed income yielding products, which have become significantly more attractive with better risk adjusted returns. Funds are flowing from venture capital into these fixed-income instruments, which is highly concerning for organizations relying on equity funding.
The Russian war with Ukraine is another scenario that is changing where investors put their money. The sudden invasion of Ukraine is considered a global macroeconomic risk, with the war generating uncertainty both in terms of duration and magnitude, thus an upward shift in various risks worldwide. People are in wait and watch mode to see how the invasion ends and its impact on the global economy. As such, investments in venture capital and other high-risk equity products are on hold. This was proven to be the case in February 2022. According to a report from Crunchbase, global venture funding slowed dramatically following the Ukraine invasion. For the first 23 days of February prior to the attack, companies averaged $1.9 billion in seed per weekday. Yet after the invasion on the 24th of February, the average dropped to $912 million.
The global pandemic may have been around for two years already, but it is a topic that continues to impact the global economic market. The world saw a huge shift in consumer behavior when COVID-19 initially hit in 2020 and VC’s investment pace slowed by nearly 30% in the early months of the pandemic. In 2021, it appeared as if the industry bounced back and was immune to the impacts of the pandemic, with $307 billion invested into startups that year. However, the COVID-19 pandemic is an anomaly and one of the most unprecedented situations of our lifetime, and the sudden surge in the availability of venture capital would not have happened without the pandemic. As life returns to normal, the economic cycle resets itself as consumer behavior shifts – and VC investors are taking note. This further contributes to the lack of VC funding available for start-ups and expanding companies requiring funding.
How to Deal with Reduced VC Liquidity
With the news of the depleting amount of equity capital available globally, many businesses have gone into a state of panic. Valuations are being slashed and employees are being laid off. However, if you are a company with predictable monthly recurring revenue (MRR), the reduction in liquidity is no cause for concern. For such companies, there are many alternative financing opportunities; predictability in MRR indicates stability within the business which increases the attractiveness to potential investors. In other words, investors can see their expected return on investment, which makes them more reassured when deploying their capital. Banks and other traditional financial institutes have yet to recognise the value and stability of recurring revenue streams and view it like a fixed income asset. However, Recur Club has acknowledged that these companies should be treated differently and has opened up an altogether new financing option for them.
Alternative Funding Options for Businesses
Recur Club provides fast, flexible and hassle free growth capital without dilution. Our trading platform connects organizations directly with institutional investors to trade their recurring revenues for upfront capital. Organizations working with Recur Club have used this capital to plan their growth in a better manner, grow their ARR, extend their runways and reduce dilutions. This differentiated financial product is a lifeline for companies previously reliant on venture capital funding. Utilizing the power of a company’s revenue allows businesses large and small to acquire financing to maintain and facilitate growth. The innovative trade-based model is also attractive for investors who have access to growing start-ups and businesses and risk-adjusted returns. In a rapidly changing, economically turbulent world, a forward-thinking approach such as this is essential for enabling new businesses to thrive.