Venture capital activity reached new heights in 2021, with roughly $330 billion invested in the United States alone, more than doubling the $128 billion record set in 2020. These two years of remarkable growth have made venture capital recruiting more challenging than ever as companies compete for a limited supply of experienced professionals.
Industry experts predicted this growth would cool in 2022. As the year’s halfway mark nears, it’s an ideal moment to reflect on whether those predictions have come to pass, and what the current shifts in the industry will mean for venture capital firms moving forward. In that spirit, here are the top trends and figures from the first half of 2022 that leaders in the sector should be tracking.
Global Funding Falls in Q1 of 2022
The anticipated slowdown has in fact arrived, and in a big way. In the first three months of the year, global funding decreased by 19% compared to the previous quarter, the largest quarter-over-quarter decline in over a decade.
While this figure may be initially alarming, it’s important to put it in context. The first quarter of 2022 was slow only compared to the record-setting investments made in the previous year. The $144 billion in global funding in Q1 of 2022 is still higher than the numbers from Q1 of 2021 ($125 billion), and more than Q1 of 2020 ($63.8 billion) and 2019 ($53 billion) put together.
For venture capital investors, and the businesses they fund, these figures may indicate a more sustained downturn is on the horizon. Having said that, though, it’s not quite time to sound the alarm bells yet.
Interest Rate Hikes Put a Check on Valuations
SaaS and other software startups in particular have seen their initial value soar over the past decade, a trend that accelerated over the past two years as many companies underwent a digital transformation in response to the pandemic. Rising inflation and resulting interest rate hikes have started to curb these sky-high valuations.
This is another trend that looks like bad news on the surface but may in fact be a blessing in disguise. Lower valuations will likely mean more investors willing to take on that risk, even in an uncertain economic landscape. While total dollars invested may continue to fall, industry experts don’t expect a significant decrease in the number of deals that will be made in 2022.
Continued Growth in Sustainable Investing
One of the sectors that saw the most growth in 2021 was ESG investing. The more than $500 billion invested in ESG-integrated products last year contributed to the 55% growth rate in these assets. What’s particularly interesting about this increase in demand is that it’s coming from the bottom up, with an increasing percentage of individual and institutional investors committing a portion of their portfolios to sustainable investments.
What makes ESG investments unique is that they’re driven as much by personal and organizational values as by risk assessment and returns. Because of this, it’s likely the rate of sustainable investments will remain steady—or even continue to grow—even as investments slow overall. A recent report from Bloomberg Intelligence supports this, anticipating global ESG assets to exceed $41 trillion by the end of 2022.
Increasing Decentralization of the Venture Market
Not long ago, conventional wisdom said tech startups should go to Silicon Valley to attract venture capital investors. That narrative has been gradually shifting over the past few years. Today, many companies started in Silicon Valley are moving to states like Arizona and Texas, where costs are lower and there’s less competition for talent, while new startups in emerging tech hubs like Pittsburgh, Atlanta, and Tampa are getting as much attention from investors as those in California.
The pandemic is at least partially responsible for this shift. Broad adoption of video conferencing and virtual meetings allows investors to easily connect with startups all over the world. The increase in remote work, meanwhile, has helped to close the talent gap in smaller markets, removing a major impediment for startups outside of established tech hubs.
The Future of Venture Capital
The phrase “unprecedented times” has become a cliché, but for venture capital investors it’s an apt description of the current environment. The sector has never seen the type of sustained growth that took place in 2020 and 2021, and the variety of factors influencing current market shifts makes it difficult to predict what the sector will look like by year’s end. Staying up to date on these developments as they unfold will help firms take the right risks in 2022 and beyond.