Venture Macro Insights 2022
R3’s global Venture Development program compiled insights from 70+ investors and startups to identify trends in how venture is handling the current macroeconomic landscape.
Economic uncertainty, quantitative tightening, inflation, and bear markets are affecting venture investing and startups across the world. R3’s Venture Development program always seeks to equip its founders and investors with tools for success. In keeping, the team surveyed its community to generate some “alpha:” primary source insights that could enable startup founders and investors to thrive during these turbulent times.
The macro TL;DR
Covid lockdowns caused a liquidity crisis, as investors raced to sell assets and hold cash. In response, the Fed and central banks cut interest rates and implemented quantitative easing (QE). The Fed, as part of its QE strategy, printed $5+ trillion USD, which yielded a +40% increase in dollar supply within just 2 years. The Fed used this new money to buy treasury and corporate bonds, injecting capital into the economy.
Fed decreases interest rates and increases money supply as part of quantitative easing (June 2022)
These actions stimulated the economy during Covid but also spurred inflation. Once the consumer price index (CPI) reached +6% by winter of 2021, the Fed flipped the switch: it began to increase interest rates and implement quantitative tightening (QT). QT involves unwinding all of the QE done during the pandemic, as the Fed sells assets to quell inflation.
With this move to QT, the Fed went from being the largest buyer in the market to becoming the largest seller in the market. The Fed’s selloff has created large sell pressure and market fear, made worse by inflation at +8% — levels not seen in 40 years.
U.S. inflation at +8% is at levels not since since early 1980s (June 2022)
How does this affect venture?
First, economic uncertainty affects risk assets. Venture is considered a risk-on asset class.
Second, public tech stocks and crypto have been hit the hardest in this recent downturn. Lower big tech valuations trickle down to private and early-stage markets, as startup exit potential declines.
NASDAQ is down nearly 40% and Bitcoin down 65% from all-time highs, aligned with the Fed’s shift from QE to QT (June 2022)
Limited partners (LPs) are also suffering losses, mitigating risk, and advising their fund managers to remain hypervigilant on new investments. This hurts a venture capitalist’s (VC’s) ability to raise new funds. Some VCs will die off or freeze investments. This investment slowdown decreases competition for deals and, thus, valuations and rate of deployment. VCs are also now prioritizing helping active portfolio companies survive, further limiting their capacity for new investments.
This outlook is a market-wide perspective. Let’s dial it in to focus on startups and investors within R3’s Venture Development community.
Market survey and insights
In light of the macro, we created a survey to test the health of our venture ecosystem and provide community-specific data to help our startups weather this storm. We sent one survey to startups and one to investors. 70+ responses came in from all regions, verticals, and fundraising stages, making these insights statistically significant.
Investor survey results and insights
Our VC survey aimed to understand investors’ advice for startups, opinions on the market, and plans for the future.
Advice: Investors overwhelmingly (78%) recommended that startups fundraise as soon as possible to extend their runway. This insight shows that investors acknowledge how difficult the fundraising environment is. Investors are unsure how conditions may change in the coming months and seem to be prioritizing runway length over all other metrics.
Opinions: 91% of our investors agree valuations will reduce. Although, they are split on the degree of change. About half of our investors believe valuations will be reduced by more than 25%, while the other half believes in a less than 25% drawdown. We’d argue this insight is bullish, as investors have witnessed tech stocks take 70%+ hits in recent months, but remain relatively more confident in venture, on average.
Outlook: 66% of our VCs remain on track to raise their next fund within 12 months. Only 9% of our VCs are not planning to fundraise within 2 years. These responses suggest that investors maintain long-term confidence in the economy and venture investing.
Startup survey results and insights
Our survey for startups looked to gain insights on how well-positioned our startups are and how they are adjusting their strategy in light of the macro. We hope these insights help founders benchmark their status and strategies against likeminded companies.
Specifically, these questions test the health of our ecosystem. We found that one third of our startups have up to 6 months of runway, another third has up to 12 months of runway, and the last third has greater than 12 months of runway. This insight suggests our startups are lagging behind investor recommendations of 12–24+ months of runway.
It’s not all bad though. 40% of startups reported prioritizing increasing runway, 62% of which by more than 2x. 28% of startups reported prioritizing cutting costs. These measures will provide a necessary safety net for startups with limited runway. Additionally, there may be some volunteer bias in these results, as founders under more pressure may be more likely to participate in an insights survey.
Many of these startups with lower runways are also fundraising sooner rather than later. Nearly half (45%) of our startups have decided to fundraise sooner than planned due to macro conditions. The majority of the startups that had reported lower current runways fell into this “fundraising sooner” bucket.
Interestingly, there were some noticeable geographic differences in fundraising strategies.
65% of EMEA-based startups reported they are “maintaining fundraising strategy” versus just 44% in the Americas and 14% in APAC.
Conversely, just 29% of EMEA-based startups reported they are planning to “fundraise sooner,” while this is the plan for 50% of startups in the Americas and 71% in APAC.
This could suggest differences in macro, volatility, and sentiment across the regions. It is also possible that varied cultural norms and responses to volatility may play some role (i.e. some regions might operate more conservatively than others during periods of uncertainty and vice versa). Nonetheless, we’ll continue to monitor fundraising plans across our global cohort of startups.
Optimistically, just 8% of our startups are planning to reduce headcount in the coming months.
In line with market trends, our data indicate that startups are feeling pressure from this economic downturn. In light of the macro environment, we recommend startups increase runways as much as possible to mitigate risks of recession and uncertainty. Investors suggest that those who must fundraise to survive do so sooner rather than later. Fortunately, despite recent fear, there’s still consensus that markets will return. Those who can survive the next 24 months should thrive well into the future.
R3’s products are enterprise-grade and regulatory-compliant, making those who build on them less subject to risk asset volatility — like what’s being seen in the crypto markets. In times like this, it helps to avoid the “hype” and build software for the long-term.
Want to join the R3 Venture Development ecosystem as a startup, mentor or investor? Click here and apply.
Here are some helpful resources to guide you on your journey:
- Webinar replay: What’s Trending in the R3 Venture Ecosystem
- A16z: A Framework for Navigating Down Markets
- Craft Ventures: Operating During a Downturn Video
- Y Combinator: Advice to Founders
- Sequoia Capital Thread on Valuations & Runway
- Lightspeed Ventures: Upside of a Downturn
- NFX’s 39 Moves to Survive the Downturn
- Neo’s Optimistic Outlook for Early Stage Startups
- The State of the Markets for VCs, Startups, and Web3 Video