Investors are cautioning that since last year, the funding landscape for startups has changed significantly. Early-stage startup funding providers advise their portfolio companies to “prepare for the worst.”
Compared to the prior quarter, worldwide venture investment for a startup decreased by 19% in Q2 2022 due to tighter liquidity and a global technology stock market crash.
Funding reached $120 billion, the lowest amount recorded in a single quarter since early 2021, Crunchbase data shows.
Second-quarter financing fell 26% quarter over quarter from $162 billion in the first quarter and 27% year over year from $165 billion in the second quarter of 2021.
It is worth noting that the year-over-year comparisons are against 2021, which was a record year for corporate funding. Funding for Q2 2022 still exceeded all quarters in 2020, when every quarter was below, and in some cases well below, $100 billion.
Late Stage Impacted
The stage of funding that was most impacted last quarter was late-stage and tech growth funding, which fell 31% quarter over quarter and 38% year over year. The reduction in late-stage funding is not all that surprising in a period when tech IPOs have slowed and growth investors have shown interest in funding early-stage companies.
In total, late-stage funding was $66.7 billion, down from $108.4 billion in the second quarter of 2021.
Bucking the trend, seed funding remained strong last quarter, growing 9% year over year by funding amount and showing that, at least for now, this stage is less affected by the recession.
Still, initial funding fell quarter-over-quarter by about 18% compared to the first quarter of 2022.
The relative strength of the early stage likely is because a startup at this stage tends to be the least affected by the current market climate, as funding is not tied to revenue. In a market that has slowed, the best funding opportunities tend to be sought in the early stages of financing.
Spending Less on Unicorn Startups
Less than 100 unicorns will be created in the second quarter for the first time since 2020. Only 62 startups are predicted to become unicorns in Q2. The worst-affected areas are expected to be the US and Asia, where there would probably be a 43%–67% decrease in the number of new unicorns.
Billion-dollar valuations have slowed, but have not fallen off a cliff. We counted 103 companies joining The Crunchbase Unicorn Board in Q2 2022, adding $167 billion in value to the board and $27.6 billion in capital funds raised. That compares with 134 in Q1 2022 and 158 new unicorns in Q2 2021.
This pace of new unicorns suggests that startup valuations still have ways to go to align with public market valuations for technology companies.
There is a time lag between a financing deal, its closing, and the announcement. Therefore, financing amounts may take a few months to catch up with the current investment climate. This is the first quarter to show a significant cut in funding since early 2020.
Increasingly in the last quarter, venture investors have warned startups to adjust to a very different funding environment. Sequoia Capital’s “crucible moment” presentation in May warned founders to prepare for a longer recovery period and to assume that capital will not be as readily available as before. Despite the caution, the firm has since announced two new funds focused on early-stage and growth companies, an indication that not all investors are slowing down.
Valuations have yet to drop significantly for those companies that have announced Series A to Series C funds in the second quarter, according to a Crunchbase News analysis. However, growth equity investors as an asset class have already pulled back.
As equity growth slows, will venture funds that have raised record amounts take over?
A Time for Prudency
Keep in mind that even if the market as a whole declines, many venture capitalists continue to invest. Additionally, a lot of growth equity investors have indicated that they will slow down or support early. Investors in venture capital are no longer looking for a lucrative idea. For a firm to succeed, real unit economics and growth margins are essential.
If you are an investor, make prudent investments and keep in mind the development stage. Finding a competent and knowledgeable provider for investing is crucial in today’s environment when dangers have escalated.