By Daniel Lanyon on Friday 15 July 2022
While some venture capital investors are noticeably retreating from the market as the economy buckles up for a potential recession, others are still writing cheques.
The global economic turmoil in 2022 has had a serious impact on startups reliant on venture capital funding with investors pulling back from the record-breaking levels of investment seen in 2021.
Nonetheless, many startups continue to buck the bearish trend and are raising money to invest in their growth, demonstrating that investors are still keen to make deals.
Lightyear, a UK-based neobroker, this week raised $25m from Richard Branson’s Virgin Group as well as Lightspeed Ventures to bolster its ambitious plans to grow through international expansion.
Martin Sokk, CEO & co-founder at Lightyear, which launched less than a year ago says the current macroeconomic turmoil didn’t affect the fundraise.
“Our product and team are both incredibly strong so we managed to raise pretty comfortably. We were oversubscribed as well, so we didn't see anyone retreating. There's a lot of noise about our market right now, and VCs are being more selective,” he said.
Morpho Labs, a DeFi company based in Paris also this week raised $18m from investors including Andreesen Horowitz and Variant.
Its co-founder and CEO Paul Frambot told AltFi that it was “relatively easy” to raise the cash despite the onset of a ‘crypto winter’ in recent months that has seen the likes of Bitcoin and Ether plummet.
“We have 20-30 funds [investing in the round] and 100 individuals. There was a little bit of change in terms of some investors but broadly speaking it was relatively easy to raise the money,” he said via a video call.
Frambot, who came up with the idea for Morpho while still a student less than 18 months ago, started to raise cash during the early summer months of 2022.
This coincided with public market tech stocks starting to plunge rapidly over fears that the economy was heading for prolonged high inflation that would lead to a harsh recessionary environment and that risks assets, particularly those on the more exotic end of the spectrum, would face a 2000s-like dot.com crash.
“When we raised the round at the time, everything [in the market] was going down. While it was not like everyone was completely bankrupt, but everybody could tell that it [the market] was about to crash,” he said.
“One of the reasons why we raised money is because I could feel that this was going to last for a long time. And so we decided to raise also in order to hedge our risk against such environments, he added.
Despite just one pull back from “one very famous investor in America” who Frambot declined to name, the funding environment remains strong, Frambot says.
However, this was more so the case for the best established VC funds with investors - limited partners (LPs) with the deepest pockets.
“We could not feel any difficulty from investors that are tier 1 like Andreessen and Variant that have a very strong reputation and strong LPs as well,” he said.
“There was absolutely no problem on that on that front. Even with business angels, there were no problems. However, for the tier 2 and tier 3 funds I experienced some of them were very impacted by the market drops,” he added.
“Some of them said we cannot invest anymore,” he said.
VC in retreat?
As interest rates have started to move swiftly upward in recent months so has the volume of money investors are speculating on future growth from fintechs and other startups moving swiftly downward.
Globally venture funding has fallen 27 per cent over twelve months when comparing the second quarter of 2022 and 2021, according to Crunchbase.
Funding to European startups across all stages reached $23.7bn in the second quarter of 2022, a material fall of 38 per cent from a peak of $38bn twelve months ago.
In addition, the price investors are willing to pay for equity and on what terms has been apparent, particularly for companies with already high valuations.
As one founder puts it, confidentially, the capital markets “have stopped putting a premium on growth”.
This has led some to expect debt funding to grow materially as founders became less happy to sell equity at lower valuations but still require external cash to grow to a sustainable financial footing.
Capchase, which funds SaaS startups with non-dilutive debt capital this week added $400m to its coffers from institutional investors bringing its total cash pile to distribute over the next few years to c.$1bn. Not bad for a firm that launched in 2020.
Interestingly Sokk says debt capital wasn’t of interest to Lightyear, highlighting one aspect of the change in the funding environment: market fragmentation.
“We were looking for long-term investors who are keen to work closely with us to challenge the European investment landscape. It's going to take a long time to achieve everything we’ve set out to do. Debt wasn't something we considered this time,” he said.
The most significant falls in terms of new cash being invested into startups have come for later-stage companies on the cusp of profitability and mooted stock market listings. Cash for this group fell 31 per cent quarter over quarter in Q2 and 38 per cent year over year, according to Crunchbase.
Klarna was valued in 2021 at $46bn making it the most highly valued start-up in Europe and one of the most highly valued fintechs in the world in a funding round led by SoftBank. Its new valuation is just $5.9bn, despite coming in at a higher level of overall funding, $800m rather than $650m in 2021.
Stripe meanwhile had a $95bn valuation putting it at the top of the pyramid in terms of startup valuations.
These developments show a vastly different funding environment for fintech in 2022 compared with 2021.
Last year frothy ‘mega deals’ dominated. These included a number of large cheques for the likes of SaltPay, Checkout.com, Rapyd ($300m), PPRO Financial ($180m), DNA Payments ($140m) and PaySend ($125m.
Challenger bank Starling Bank ($376m), crypto trading platform Blockchain.com ($300m), pension and payroll providers Smart Pension ($230m) and ClearScore ($200m) also all landed impressive investments.
In fact, the year recorded the highest number of fintech deals over $100m.
In contrast to the pressure on later stage ‘mega deals’,
early stage seed funding is robust thanks in part to the rapidly growing number of new founders emerging from the later-stage fintech companies, some of whom have benefited from exits.
Jessica Chen Riolfi, co-founder and CEO of Uprise, a fintech company based in the US that also closed its $1.4m seed round says that securing investment was not adversely affected by the current market conditions.
Institutional investors in its new round included Contrary Capital, Hustle Fund, On Deck, and Dash Fund while a number of well-known individual investors also participated including Dan Mackin, co-founder of SoFi, Eddie Kim, co-founder of Gustom Michael Giles, CEO/founder of Cash App, Sean Harper, CEO and co-founder of Kin, Nick Hungerford, the founder of Nutmeg among a number of others.
Nonetheless, Chen Riolfi, formerly of Wise, which went public in an £8bn direct stock market listing in 2021, says Uprise has been funded in part with its founders' own capital.
Aside from market fragmentation for capital, might 2022’s new funding environment have other consequences?
As a female founder, Chen Riolfi says she can see how VC cash might be harder to come by than normal, a state already well known as dreadful.
“When the market contracts, VCs tend to revert back to pattern matching, which is harder as a non-traditional founder. One thing said that somebody said to me that really resonated was, we're in this game to beat the odds. The odds are slightly higher, but we're gonna be the one to beat the odds and keep going," she said.
“Customers will be the ones to really make it work. it's less about VC funding and more about, really creating value for people," she added.