Where venture capitalists are investing in 2022 — Quartz

Never has so much money flowed into venture capital.

In the first quarter of 2022, US venture capital firms raised more money for new funds than in all of 2019, according to Pitchbook. But these new funds have not translated into more investment in startups. Instead, global venture capital investment fell sharply in the first quarter, down from record highs a year earlier.

“We have rapidly, perhaps abruptly, moved from a hyper-foamy venture capital environment to a world where many deals are not closed,” wrote Matt Turck, a partner at venture capital firm FirstMark, in a blog post at the end of April.

The slowdown is a sign that investors are reassessing the landscape in light of inflation, the war in Ukraine, a poor IPO market and the risk of recession.

Still, “there’s a ton of dry powder out there,” said Jeffrey Bussgang, partner at Flybridge Capital Partners. “All major growth-stage investors, such as Tiger, Softbank, Insight, Sequoia, Thrive and General Catalyst, among others, have raised massive new funds.”

The question hanging over the startup sector is where will all that money go? Based on data from PitchBook and conversations with VCs, here are three possible answers.

Seed Deals

Arguably the main driver of the VC reset is public market cooling. A PitchBook analysis in March found that the 10 biggest tech IPOs of last year had all lost between 18% and 68% of their value since their IPO.

But the younger the startup, the less it has to worry about public procurement; a seed-stage company may be a decade away from an IPO. So in 2022, VCs are pumping more money into early-stage startups in hopes of waiting for IPO interest to lull..

“We’re still seeing a lot of activity in the seed stage,” said Sarah Hodges, partner at Pillar VC. And “we see more advanced companies moving sooner as they recognize the seed opportunity.”

What types of businesses are funded? Hodges mentioned biotechnology and sustainability. Bilal Zuberi, Partner at Lux Capital, discussed semiconductors, climate technology, defense technology, supply chains and agriculture.

“After more than a decade of building consumer and then enterprise SaaS businesses, I anticipate that VCs will try to seek diversity and longer-term bets,” Zuberi told Quartz.

Crypto

Oh, and of course Hodges and Zuberi both mentioned crypto. Despite the decline in VC, crypto startups in the US raised a record amount in the first quarter of 2022.

Crypto startups made an exception to the decline of giant deals at a later stage. FTX, the cryptocurrency exchange, has raised $800 million in January, including from Softbank’s Vision Fund 2 – despite rival Coinbase’s shares being down by almost half in its first year since its IPO. In another sign of crypto momentum, Andreessen Horowitz, one of Silicon Valley’s biggest backers, recently announced a new research center dedicated to the subject.

Europe

Unlike in the United States, European startups maintained their momentum through 2022. Despite the war in Ukraine, VCs invested €27.5 in Europe, a slightly higher rate than the rate of 2021, which, as in the United States United, set a record.

European fintechs had a particularly strong quarter, led by companies like Checkout.com in London and Qonto in France. The UK and Ireland lead Europe in dollars invested in venture capital.

(Asia, which is a larger venture capital market than Europe, also saw declines in the first quarter of the year. A partial exception was India, where Andreessen Horowitz plans to invest. )

When the music stops

None of these exceptions can last forever.

The crypto may stay hot for a while due to the momentum around NFTs, but the prospect of regulation is as important as the macro factors driving the rest of the VC. And these factors apply just as much to Europe, which also risks fall into recession; There is already signs that European venture capital activity is slowing down. Seed and early-stage markets can absorb additional capital as investors reevaluate, but deals are by definition smaller and there’s simply too much money parked in venture capital funds to distribute it all in checks. of a million dollars.

“Venture capital investing is typically cyclical,” said Steven Kaplan, an economist at the University of Chicago. It rises and falls with the overall economy. If there is a recession in the United States this year – there is about a one in three chance of it happening – expect venture capital investment to fall further. Fortunately, if there is a recession, it will probably be moderate. And since 2002, venture capital funding has just once declined two years in a row: a slight drop in 2007 followed by a sharp drop in 2008.

The most likely outcome, therefore, is that venture capital activity will rise again by the end of 2022. The skyrocketing valuations that were reported last year might not come back so soon.

“Valuing companies at 30-100 times revenue has never been sustainable. At some point, the market was going to correct itself, but nobody wanted to be the company left behind while the music was still playing,” Bussgang told Quartz.

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