The current state of affairs arose as a result of the Global Financial Crisis. Since 2008, the US experienced an unabated 12 year bull market fueled by four waves of money printing which increased US money supply by 30%+. The fundraising environment is a direct result of this inflation.
As we enter the late innings of this bull market, fundraising is becoming more difficult as investors become more risk averse. In the first quarter of 2020, VC-backed companies raised $56.96B across 1617 deals, down 39% in deal value and 36% in deal volume from Q417. This was the lowest quarterly total since Q212.
The fundraising environment will continue to change in response to macroeconomic conditions. As we head into an uncertain future, here are three things to expect in 2023:
First, fundraising will continue to be more difficult as investors become increasingly risk averse. Second, the number of unicorn IPOs will decline as investors put more pressure on companies to achieve profitability. And third, the average deal size will increase as investors seek to deploy capital more efficiently.
Despite these challenges, fundraising will remain an essential part of the startup ecosystem. In order to succeed, startups will need to adapt their strategies to the changing environment.
Market Trends in 2023
The fundraising environment in 2023 will be shaped by macroeconomic conditions. The most important trend to watch will be the interest rate cycle.
In December of 2018, the Federal Reserve raised rates for the fourth time that year, bringing the Fed Funds Rate to a range of 25-50 basis points. This marked the end of an accommodative monetary policy cycle that had lasted over a decade.
As we head into 2023, the Fed is expected to continue raising rates at a gradual pace. This will have a number of implications for fundraising. First, it will make debt more expensive for startups. Second, it will reduce the pool of potential investors as some venture capitalists are forced to deleverage their portfolios. And third, it will make it more difficult for startups to access capital through traditional channels such as bank loans.
In response to these challenges, startups will need to be creative in their fundraising efforts. One option is to focus on impact investing, which is a growing trend in the venture capital industry. Impact investors are interested in supporting companies that have a positive social or environmental impact, even if they sacrifice some financial returns.
Another option is to look beyond traditional sources of funding such as venture capitalists and angel investors. Startups can increasingly tap into alternative sources of capital such as initial coin offerings (ICOs) and security token offerings (STOs). These fundraising methods have become popular in recent years and offer a way for companies to raise money from a wider pool of investors.
The fundraising environment will continue to evolve in response to macroeconomic conditions. In order to succeed, startups will need to be creative in their fundraising efforts and tap into alternative sources of capital.