2022 started out like the end of 2021, filled with big funding rounds and fat checks. But the Russian invasion of Ukraine and rising inflation have hit the tech world.
Valuations have fallen and investors are exercising caution with their wallets. Trading room details shows a total of $27.1 billion invested during the second quarter of 2022, the lowest total since the first quarter of 2021.
We know that the market has changed. But how and when will it recover again? We asked a VC, a lawyer and a founder what they think.
To understand the current market, understand the old
Hussein Kanji, a VC at Hoxton Ventures, which invests in early-stage tech companies across Europe, says that in recent years saw the rise of European technology – almost comparable to round valuations and sizes seen in the US.
“We have just reached a point in the market that we have never seen before”
“Maybe five or ten years ago, this was a very nascent market. This was a market that was establishing itself and getting closer and closer to US standards,” Kanji tells Sifted. “We were a little up and up.”
Mike Turner, start-up partner at law firm Latham & Watkins, agrees, adding that Europe experienced unprecedented growth.
“It was really extraordinary at the end of last year and even in the first quarter of this year, the amount of capital that was being deployed,” he says. “Companies could delay their initial public offering or other exit while they were able to raise financing rounds of hundreds of millions of dollars, sometimes even beyond a billion dollars.”
But what goes up must come down, and European technology sure did. “We’ve just reached a point in the market that we’ve just never seen before,” adds Turner. “You had to have a correction at some point.”
A technological recession or a financing challenge?
But this period of financial euphoria was not without irregularities. Ciara Flood, co-founder of &Open, a startup that enables businesses to give away large-scale gifts, says the current market reminds her of the market during the height of the coronavirus pandemic.
“Funding has become more limited as investors face a series of challenges, including market valuations and consumer confidence.”
Flood stopped fundraising for his startup in 2020 and remained ripped off until market conditions improved.
“From March to August  It was actually a more difficult time than people say,” Flood tells Sifted. “There was a period of time that feels pretty similar to what we feel now, which is people don’t really know what’s going on or what’s around the corner.”
Turner agrees with the comparison to Covid. He says that the current state of the market is like a pause for breath, where investors have slowed down and companies are more cautious.
“Financing has become more limited as investors face a host of challenges, such as market valuations and consumer confidence,” he says.
downs and ups
while we’re watching almost as early-stage venture capital investing as we always have, Turner says is more focused and the timeframes are longer. In the middle stage, investors focus even more on diligence, but he says closing deals, where it really slows down in the later stages of growth.
“BBecause it’s harder, most people say don’t test the waters right now“
But, Kanji says, while it may sound similar, we’re not repeating the market conditions of the dot-com bubble when money was taken out of the system and capital really disappeared.
“Venture companies were moving away from term sheets, there was a chain reaction,” he says. “None of that is happening today. Everyone has money, it’s called ‘dry powder’ in our industry, everyone has the ability to spend.”
This is reflected in the fact that there are still uprounds. For example, the insurtech Wefox has just raised in a 50% up in this market and it is a unicorn.
“There are still rounds being made in reasonable sizes at reasonable valuations, even relative to the boom times we’ve had in recent years,” says Kanji. “But overall it’s harder and because it’s harder, most people say don’t test the waters right now.”
When will the market recover?
Turner is optimistic about the market recovery. He says that while e-commerce, retail and anything consumer-facing will have to deal with rising inflation, other sectors will remain strong.
“The technology sector may turn out to be one of the beneficiaries of the recession,” he says. “More and more companies will have to turn to innovative software and other technology products to stay competitive.”
With capital on the sidelines, Turner sees the possible return of confidence and activity before the end of the year, noting that some of the big tech companies have positively surprised the market in recent weeks.
Kanji, however, is a bit more reserved. He says that because investor sentiment is uncertain, it’s hard to tell when the market will recover.
“I don’t think anyone really understands what’s going on, so the sentiment hasn’t really changed at the moment,” he says. “People are not going to go out to financing rounds, the inaction she was talking about could last for a while.”
Tips for founders
What can founders do to outperform today’s market? Kanji says that most venture capitalists tell companies not to go out fundraising unless their startup is desperate. Therefore, the focus must be on cash preservation.
“We are seeing more diversity in the financing market“
“It’s about extending your runway,” says Flood. “At &Open we are still growing our team and business, but we are definitely not being as aggressive as I think we would have been if this was 2021 in a different environment.”
Turner says founders also need to be aware that the landscape is changing when it comes to where capital comes from.
“We are seeing more diversity in the funding market,” he says, citing the growing influence of Middle Eastern capital in the European tech market as an example.
Turner adds that it is also a very good time for US investors to enter European markets, as the dollar is very strong against the euro and the pound.
“They have a particular reason to look at Europe at the moment,” he says. “Valuations are a tick lower, but the dollar is two ticks stronger.”