The current state of the market, explained by a VC, a lawyer and a founder

2022 began as the end of 2021, filled with large funding rounds and heavy checks. But the Russian invasion of Ukraine and rising inflation did has knocked out the world of technology.

Valuations have fallen and investors are exercising caution on their portfolios. Business data Shows a total of $ 27.1 billion invested during the second quarter of 2022, the lowest total since the first quarter of 2021.

We know the market has changed. But how and when will it resume? We asked a VC, a lawyer and a founder what they think.

To understand the current market, understand the old one

Hussein Kanji, a VC at Hoxton Ventures, who invests in early stage tech companies across Europe, says that in recent years saw the European tech boom – almost comparable to the rounded valuations and sizes observed in the United States.

We have just reached a point in the market that we have simply never seen before “

“Maybe five or ten years ago, this was a very nascent market. This was a market that was emerging and getting closer and closer to US standards, “Kanji tells Sifted.” We were a bit on the rise. ”

Mike Turner, an emerging partner of the law firm Latham & Watkins, agrees, adding that Europe has seen unprecedented growth.

“It was really extraordinary at the end of last year and also in the first quarter of this year, how much capital was distributed,” he says. “Companies could delay their IPO or other exits while they have been able to raise rounds of funding worth hundreds of millions of dollars, sometimes as far north as a billion dollars.”

But what goes up must come down – and Surely European technology has done it. “We have just reached a point in the market that we have simply never seen before,” adds Turner. “You had to have a fix at some point.”

A technological crisis or a funding challenge?

But this period of financial euphoria was not without its hitches. Ciara Flood, co-founder of & Open, a startup that allows companies to give gifts on a large scale, says the current market reminds her of the market during the height of the coronavirus pandemic.

Funding has become more limited as investors face a range of challenges, such as market valuations and consumer confidence

Flood blocked his startup’s fundraising in 2020 and was blocked until market conditions improved.

“From March to August [2020] it’s actually been a harder time than they say, “Flood tells Sifted.” There was a period of time that feels quite similar to what we’re hearing now, which is that people don’t really know what’s going on or what’s around the corner “.

Turner agrees with the comparison with Covid. He says the current state of the market is like a breather, where investors have slowed and companies are more cautious.

“Financing has become more tied up as investors face a number of challenges, such as market valuations and consumer confidence,” he says.

Downround and upround

While we are seeing almost as much early on in venture capital investing like we’ve never done before, Turner says it’s more focused and the timelines are longer. In the middle stage, there’s even more focus on investor diligence, but he says deals are underway – where it really slowed is in the later growth stages.

“Bas it is more difficult, most people say not to test the waters right now

But, says Kanji, while it may sound similar, we are not repeating the market conditions of the dotcom bubble when the money was withdrawn from the system and the capital actually went away.

“The venture capital firms were walking away from the deadline, there was this chain reaction,” he says. “None of these things are happening today. Everyone has money – in our industry it’s called “dry powder” – everyone has the ability to spend. ”

This is reflected in the fact that there are still some twists and turns. For example, the insurtech Wefox just raised a 50% more in this market and it’s a unicorn.

“There are still rounds going on of a reasonable size at reasonable valuations, even compared to the boom times we’ve had over the past couple of years,” says Kanji. “But overall it’s harder and because it’s harder, most people say they don’t test the waters right now.”

When will the market resume?

Turner is optimistic about the market recovery. He says that while e-commerce, retail and everything consumers face will have to contend with rising inflation, other sectors will remain strong.

“The technology sector could prove to be one of the beneficiaries of the recession,” he says. “More and more companies will have to turn to innovative software and other technology-based products to stay competitive.”

With capital on the sidelines, Turner sees the possible return of confidence and activity before the end of the year, noting that some of the big tech companies have positively surprised the market in recent weeks.

Kanji, however, is a little more reserved. He says that because investor sentiment isn’t safe, it’s hard to know when the market will recover.

“I think no one really understands what’s going on and so the sentiment hasn’t really changed right now,” he says. “People don’t go out for funding rounds, the inactivity I was talking about could be prolonged for a while.”

Advice for founders

What can the founders do to overcome the current market? Kanji says most VCs are telling companies not to go out for a fundraiser unless your startup is desperate. Therefore, the focus should be on the conservation of money.

We are seeing greater diversity in the finance market

“It’s about expanding your catwalk,” says Flood. “At & Open we are still growing our team and business a lot, but we are definitely not as aggressive as I think we would have been if this were 2021 in a different environment”.

Turner says founders should also be aware that the landscape is changing when it comes to where the capital comes from.

“We are seeing greater diversity in the finance market,” he says, citing the growing influence of Middle Eastern capital in the European technology market as an example.

Turner adds that it is also a great time for American investors to enter European markets, as the dollar is very strong against the euro and the pound.

“They have a particular reason to look to Europe right now,” he says. “Valuations are one tick lower, but the two dollar mints are stronger.”

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