A pineapple wearing sunglasses with balloons having a party

After the party comes the hangover

fundraising management risk Feb 01, 2022

For all the research devoted to understanding hangovers, and there has been a lot, we still don’t understand much about the phenomenon. Swedish sailors, Swiss mice, and students in the Netherlands and America have all been intoxicated in the name of science, only to find what we all knew: hangovers manifest themselves in an array of undesirable symptoms and are caused by excessive alcohol consumption. Many founders and would-be founders may have raised a glass or two on reading CB Insight’s latest State of Venture (Q3 2021) report. The numbers are, we are pleased to say, all up and to the right.

Prepare yourself for a stat attack…

-Global venture funding is up 105% YoY to $158bn.

-The unicorn population is up 58% YoY to 848 unicorns. This 311 more than the same time last year, after the second most fertile quarter ever (127).

-The number of mega deals ($100m) is up 136% YoY after a record for the fifth straight quarter (409).

-Late-stage valuations are up 110% to a median of $1.1bn.

-The funding of US start-ups is up 90% YoY. Asia 95% YoY. Europe up 87% YoY. UK up 140%.

-M&A deals are up, a positively modest 13% YoY.

-The average global deal size is up 50% to $25m.

There’s no doubt about it – venture has been having an epic party. Are you likely to be invited? And what comes next?

If you are a new founder, these numbers sound great but are not universally in your favour. Those mega rounds are taking an increasing share of available funding (~60%), which is great if your business can raise $100m, and damaging if you can’t. From Seed right through to Series E+ the period between funding rounds is also dropping, so hungry beasts will be back sooner to gobble up more of the investment pie. Early stage investment continues to take the lion’s share of funding (62%), but this is down from 65% in 2016. The number of deals in Europe is up YoY but down on the last two quarters, suggesting investors are being more selective. If you want to be a unicorn then you’ll want to be in America, as more than a half are created there (less than 1/8th in Europe). The vast majority of exist are from M&A rather than IPOs, which is good news as this is more attainable. The bad news is most of the value is realised by SPACs, so you need to make sure you are on their shopping lists.

So there may be some challenges, but let’s face it, there is a lot of money out there looking for a good home. The more interesting question is what comes next. Will it be the equivalent of a late night taxi to the nightclub to keep the revelry going before an ill-advised kebab on the way home? Or the mother of hangovers splitting your head apart like an over-ripe watermelon?

The record levels of dry powder accumulated before and during the covid period suggest the party will go on. Corporates have been buying companies like they are going out of fashion, which is the kind of incentive investors need to fire off their own powder. Big exits also refill magazines. There are some very large family offices out there as part of a $6tn industry. The bar is unlikely to run dry any time soon.

But there is also an increasing hangover risk. Because venture capital is not the only thing that has been soaring. So too has global spending as countries bounce back from the enforced covid economic interregnum. It’s not just investors but consumers who have dry powder, thanks to the Governmental furlough schemes. In the UK alone higher household savings are estimated to be worth £200bn. Since there is an abundance of cheap money, the UK Government has also scooped up another £150bn to pump into the economy through investment in health and public services. 

There is a point, though, when all this money becomes a bad thing, and we are approaching it. Because an over-supply of money creates inflationary pressure. The last 15 years of start-up success were achieved in a low inflation environment, where growth created wealth. In a high inflation environment, the same growth can lead to wealth erosion. If you start at 100 and grow 5% with zero inflation, you end with 105. If you grow 5% in an environment where there is 5% inflation, you end up with 99.75, which is less than you started with. Both the UK and USA are already forecasting 5% inflation.

Inflation is a tricky concept. Too much is bad. Think Weimer Germany and people running around with wheelbarrows of marks. Too little is also bad, as it comes with the risk of deflation and encourages delayed consumption (what John Maynard Keynes called the paradox of thrift). What no one knows, let alone control, is the optimal level of inflation.

One thing is clear though: rising inflation is bad news for most start-ups. Firstly, it can hit consumption, as people limit spending. That means more scrutiny and a greater risk of substitution or retrenchment. Especially if people have to pay higher taxes to cover the cost of furloughs and excessive Government borrowing. Costs of pretty much everything go up. Wages start to spiral as employees can’t afford to live on a static salary. The funding you have stashed away to cover your runway will not go as far as you’d planned. Currency can come under pressure, with any relative drops making your prices more expensive to global customers. Traditionally, inflation has also chased investors away from the market. They are likely to be the smaller investors most likely to back early stage businesses. This leaves you at the mercy of bigger backers, who tend to do well as they have portfolios that include businesses that thrive in higher inflation environments.

Start-ups also don’t have the three strategies available to them that most businesses use: raising prices (which can be fatal in ultra-competitive markets); cutting costs (most start-ups are lean and have little to cut); and the use of technology to boost productivity (again, not much room here). Some businesses with ultra-low costs, such as digital marketplaces, won’t suffer. Nor will those that have the capacity to control the price of goods and benefit from price rises. But most will come under additional pressure.

So you can still get an invite to the venture party, but expect inflation to cause you some headaches both before and after. Try to manage these by updating your budgets and cost forecasts before, rather than after everything has become more expensive, so you can remain a semblance of control. If there is the opportunity to raise prices, introduce premium services or new streams of monetisation, you should advance plans to do so immediately.

Ultimately whether or not these headaches become massive hangovers will depend on your ability to grow faster than the rate of inflation. If you were planning 10% growth before, now you need to grow 15% to stand still. But don’t lose heart. Achieving more with less is the essence of entrepreneurialism. As a founder, you are better placed than other small businesses to cope with the challenge. You’ll need to be at your peak though, so maybe give the kebab a miss…


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