Fundraising slowed down significantly in the first half of 2022 as capital became more expensive, Russia’s invasion of Ukraine became more serious, and markets and entrepreneurs accepted the ongoing recession.
According to the Financial Times, companies around the world raised $4.9 trillion in the first half of 2022 through new bonds, loans, and equity. This represents a decrease of 25% from the $6.6 trillion raised in the first half of 2021.
At the end of May 2022, Pitchbook, the venture capital, private equity, and M&A database, published its Global Private Fund Strategies, summarizing private capital fundraising activity. According to the report, Q1 2022 private fundraising figures were less than one-quarter of total 2021 fundraising, indicating a slowdown. This, however, does not indicate the market is “nose-diving.” The total VC funding in 2021 was $620 billion, a 108% increase from the year before. The number of private Unicorns valued at $1 billion or more rose 69% in 2021 reaching 659 globally. This number of high valuation companies is not only insane but also unsustainable as it is not based on realistic profitability and market value creation.
While many unicorns still have capital available, the majority will need to hit the markets again to raise more capital at a much more realistic valuation. As companies deal with slowing growth, the ongoing technical recession, and geopolitics volatility, marketing budgets get cut, and hiring stops altogether, as also shown by mature companies like Meta, Amazon, and Instacart.
High valuation companies without a clear path to profitability might be forced to sell at a big discount or could even shut down their operation if they do not have a culture of high balance sheet discipline. One of the lessons for entrepreneurs that have not lived through a time of crisis is to mitigate their constant optimism, with a better risk management culture that also projects downturns and non-growth scenarios.
Market Trends: Overall, it’s likely going to be harder to raise capital in 2022-2023, and early-stage companies and inexperienced executives could face difficulty fundraising due to their limited track records and non-established relationships with the investment community.
Interest rate expectations have also rapidly been recalibrated, and investors now expect the Federal Reserve’s interest rate to stabilize around 3.5% by the end of 2022. This means markets could end the year with the highest federal funds rate since the 2008 financial crisis. Entrepreneurs should get used to the transition from cheap capital dominated by “Quantitative Easing” to expensive capital dominated by “Quantitative Tightening.”
Globally, the slide in new fundraising is concentrated among lower-quality companies, while high-quality, investment-grade issuance remained more in line with its historical trend. Junk bond sales in the US sank to less than $60 billion, down from more than $250 billion in 2021.
Companies raising between $500,000 and $5 million might have the hardest time over the next 12 months given that this early-stage venture capital space has experienced a significant slow-down as investors wait for better market conditions and more reasonable valuations.
One potential way to mitigate the fund-raising challenges going forward is to offer better terms to the risk-averse investors. For example, entrepreneurs can offer participation rights in preferred shares that give investors “double dip” earnings when companies exit. This is a costly way to raise capital, with greater stock dilution for founders and employees with stock options.
Industries that raised more in 2022
Contrary to the overall slower market trend, there are some sectors that have continued to attract large investments from venture capital as well as from family offices. These sectors that raised more in 2022 include digital marketing, blockchain, gaming, supply chain management, renewable energy, and cyber security. In 2023, we anticipate that climate-related sectors, including green energy, electric vehicles, and decarbonization technologies will receive big interest from investors also given the changing policies that require companies to have net-zero emission targets.
Recommendations going forward
The financing options for corporations aren’t great now particularly if the companies are far from profitability. Investors may be seeking much better terms across fewer deals that can display a higher level of cash flow. The outlook for fundraising may now focus on quality, and it will occur for companies that are already sector leaders with strong market share and fast-growing revenues.
Having said that, the capital raise slowdown is not necessarily all bad news. Central banks hope that raising borrowing costs will slow capital demand and, in turn, reduce price rises. The slowdown in capital raising witnessed in the first 6 months of 2022 is a signal that global central bank efforts, particularly in the US and in the EU are starting to pay off. If anything, periods of crisis create an opportunity to accelerate change at a much quicker pace.
Now seems like an ideal time for entrepreneurs and business leaders to adapt to these changing market conditions and come out of this period with a renewed focus on digital transformation, sustainability and focus on the sector you know best.
A final word of advice, if you are in the market for capital, the Gulf Cooperation Council (GCC) countries such as the United Arab Emirates, Saudi Arabia, and Qatar are awash with cash given the sustained high energy prices which resulted in massive revenues increase for them. These countries are interested to invest in early-stage and disruptive companies, particularly if they are willing to do business in the Gulf. Time to seize this crisis moment and think boldly.
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