01 Oct 2022

Venture Capital Dry Powder is Building Up…

Our FS team analyse Financial Times's Sifted inaugural in-person summit, where everything was discussed from how to hire the best talent right through to how, and when, founders should exit.

Matt Village

Last week a few of the MHP Mischief team headed over to Greenwich for FT Sifted’s inaugural in-person summit. Thousands of people from across the tech and investor ecosystems gathered to discuss the latest innovations in the space, discussing everything from how to hire the best talent right through to how, and when, to exit.

Amidst all the chatter, one message rang clear across all conversations – the current fundraising climate is more challenging than it was twelve, or even six, months ago. Businesses of all shapes and sizes have pivoted from a ‘growth at all costs’ mindset, to one where profitability and sustainability is the focus. This is naturally being led by a tightening of the purse strings from investors. The days of the 2021 mega-round are past us, and as one Index Ventures partner noted recently ‘last year was the party and this year is the hangover’.

It’s reflected clearly in the numbers too, with CB Insights data showing that global venture funding hit $74.5B in Q3 2022, a nine quarter low. This was a 34% drop quarter on quarter – the largest percentage drop in a decade.

Taking a step back, this market dip is a good thing for the overall health and stability of the tech ecosystem. While of course it’s never nice to see companies announce layoffs or downrounds, the truth is that the market has always moved in cycles, and those that survive difficult conditions come out of the other side stronger and lead to better long-term outcomes.

To butcher a G. Michael Hopf quote: “Hard times create strong businesses, strong businesses create good times, good times create weak businesses, and weak businesses create hard times.”

The good news for businesses going through those hard times right now is that, by all accounts, there’s a mountain of VC dry powder waiting for them on the other side should they make it. Investors were keen to stress at the Summit that while they may be being more selective with who they invest in currently, there’s still capital available in the market and there are huge stockpiles behind the scenes just begging to be allocated. Few investors are actually reducing fund sizes, meaning that available capital, or dry powder, is building and building.

So when are we going to get back to the party and shake off our hangover? The truth is that nobody really knows, but we heard estimates that VCs are anticipating a market pickup as early as late Q1 / early Q2 next year – so we may not be waiting all that long. That’s an exciting prospect for startups building currently.

However, not everyone has the runway to wait it out, which is what’s led to the downrounds, layoffs and closures that we’re seeing now. Capital is still available though, it’s just tougher to get and comes at more of a premium. Nevertheless, here’s what VCs and angel investors are looking for currently:

  • Profitability – The pursuit of growth above all else is no longer in vogue, investors want clearer evidence of that path to profitability, and positive unit economics
  • Sustainability – Scrutiny around making a wider positive impact is no longer reserved for the bigger players. Every business, no matter the size, will get asked about its thoughts and strategy around environmental and social impact
  • Top talent – The battle for talent remains in the industry, and it’s not going away anytime soon. Put simply, there aren’t enough quality developers and engineers in the market for everyone currently. Having strong product and tech employees will give you a significant edge
  • Vision – As always, a founder’s vision and their ability to effectively communicate that is paramount

Interestingly, that ties to a trend we’re seeing here at MHP, particularly when it comes to fintechs. The briefs we’re receiving from clients and prospects are less about ‘help me directly drive sales to end-users’ and much more frequently ‘help us tell our story in a way that attracts top talent and investors’. Employer brand building has never been so important as the war for talent only intensifies.

The next few months will be tough for startups, there’s no doubt about that. Those that survive though, will be better positioned for growth in the medium to long term. If there was one key takeaway from the Summit, it’s not a question of when the fundraising market will pick back up, but when.

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