A contribution from Dirk Steller Founder and Managing Partner of Seed Space Venture Capital
The VC landscape has shifted enormously over the past five years, with the pandemic having material impacts that have unwound since it ended in 2022. Many bemoan the fall from the frothy highs of the ‘bull market of everything’ in 2021-22, but to do so fails to heed the longer term trends.
Over the past ten years, global VC investment has averaged around $254 billion per year, with steady growth for the first five years of that period before a dip in 2019, then the huge COVID upswings of H2 2020, 2021 and 2022. If we look either side of those boom years, we see that 2023 and 2024 YTD generally follow what we would expect from a market growing at a sensible pace.
The uncertainty of the pandemic drove investors away from themarket, but the bottoming out of interest rates combined with massive public spending came alongside intense interest in new solutions for remote work, healthtech, biotech and digital transformation. This saw a huge influx back into VC in H2 of 2020. This was also boom time for the mega-round, as later stage companies with track records and relevancy in the pandemic raised eye-watering sums to accelerate their growth.
Other areas that benefited during 2020-2022 included fintech, ed-tech and e-commerce, as banking, learning and shopping all went online. Emerging markets with rapidly growing middle classes were standout performers, with India and South-EastAsia both outperforming their peers.
As the pandemic years stretched on there were other implications for VC. Both companies and investors found they could cast a broader global net, with due diligence going online and more sophisticated data techniques enabling dealmaking without face-to-face contact.
By the end of 2021, VC had peaked in a big way, with over $661 billion poured into the sector – more than double any previous record year. Continuing low or zero interest rates; the roaring success of tech unicorns who could play into the pandemic zeitgeist; a good run of big-money exits, and a decent case of FOMO among investors saw money flowing as it had never flowed before.
2022 was more subdued by 2021 standards but still saw frothy enthusiasm for VC. It was not until interest rates began their painful northward march that the money flow began to taper off. The Ukraine war fuelled fresh uncertainty as the COVID panic faded away; inflation bit into profitability, and continuing supply chain problems, put up with during the height of COVID, began to diminish VC appetites.
Just as substantial was the impact on companies themselves. Supply chain problems made an unfortunate marriage with skyrocketing cost of capital. Many companies who had attracted
big tickets in preceding years found themselves burning cash at an unmanageable rate and struggling to procure key items as prices began to climb. As these companies began to falter and fail, VCs became yet more cautious, retreating to the sidelines to keep their powder dry until the victims of this more challenging economic climate had washed through the system. A difficult conclusion to 2022 and a very challenging 2023 saw deals and funding fall far away from pandemic highs.
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