What a looming bear market means for start-ups and their funding
The S&P 500 – which remains the global benchmark for investors – has dropped an alarming 18.7% this year, treading along bear territory. Adding to this, the tech-intense Nasdaq index has already entered a bear market, marking the beginning of one of the worst markets in post-war history. In the UK, the FTSE 100 is demonstrating resilience and keeping steady, however, investors across the world are assessing their options in the stock market and approaching with caution. The critical question for start-ups is, what impact will stock market falls have on private market valuation and funding?
Yech stock, which was once the allure of the market, has now seen a landmark sell-off due to low valuations and a mix of macroeconomic headwinds. The bearish stock market, rising inflation rates, higher energy prices and the impending recession are causing investment houses to dig deeper to fulfil their existing commitments, causing VC funding to slow in Q1 of 2022. Indicative of this, the team at investment powerhouse Tiger Global, which works as one unit to make both hedge fund and venture bets, reportedly had already all but abandoned late-stage venture deals after suffering losses of $17BN in the tech sell-off.
Everyone in the UK business arena, including start-ups will feel the trickle-down effects of this. Claire Trachet, CEO of business advisory Trachet, who are experts in M&A and fundraising for tech start-ups, says early-stage companies are still an attractive investment proposition because of the low risk-high reward nature of investing in early-mid stage ventures. However, Claire highlighted that the challenge for start-ups lies in fitting a new investment criterion which will focus less on promises and inspiring pitches and more on financial modelling, strong cash flows, and unit economics.
As a vast number of UK businesses rely on this type of investment to grow and scale, a VC pullback means more strain will be put on the UK economy, adding to the already inevitable recession. Trachet commissioned landmark national research finding that 47% of Gen Z Brits and 39% of Millennials stated If they were to start a business, they’d be looking to procure investment to facilitate rapid growth compared to just 24% of their Gen X counterparts, illustrating a generational shift in behaviour for a new wave of entrepreneurs leaning towards fundraising.
Business advisor, Claire Trachet, CEO & founder of Trachet comments on the VC pullback of 2022: “Venture capital tends to work as a reactive market, each start-up depends on the next stage (either a subsequent round of financing or an exit) for their short-term success – usually every 16 – 18 months. The start-up ecosystem has enjoyed a generation of businesses that have only experienced a bull market, where funds and good terms have been widely available.
“As the world enters a bear market, it is the late-stage start-ups with a negative cash flow (a lot of them) and that have raised money at high prices, that are going to be the most compromised – the well of free money has dried up. There must now be a behavioural shift in early-stage companies towards making their operations sustainable in the absence of VC investment.”