As we start the new year, we thought a moment of positive and rational perspective about the state of the world might be welcome.
Ironically, we're going to start with the Stoics, but don't worry. We won't linger long in pessimism. Thousands of years ago, these philosophers established the concept of premeditatio malorum (the premeditation of evils). This philosophy advocates for starting with a logical and reasoned determination of everything that could go wrong so that they would be prepared and better able to prevent those things from happening.
You might be familiar with one of the more famous Stoics, Marcus Aurelius, who wrote to a friend, "Nothing happens to the wise man against his expectation, nor do all things turn out for him as he wished but as he reckoned — and above all he reckoned that something could block his plans." (That letter was probably as welcome to his friend as all the sky-is-falling emails you're getting.) His point was that by reviewing and rehearsing his plans and recognizing the context around him, he was equipping himself to consider "what if" for each future decision. And that process would help him to prepare for, endure, and even possibly optimize what was to come.
If you'd prefer the wisdom of more recent naysayers, try Mike Tyson's comment, "If you're not humble, life will visit humbleness upon you." Again, approach the world with a healthy dose of caution, reason, and readiness.
The point is, preparation is good. Preparation with a heavy dose of cynicism or pessimism can be even better. It's rarely a bad idea to consider both intrinsic and extrinsic challenges in your decision-making processes. And in fact, in venture capital, it's measurably wiser to begin evaluating a potential investment with a fiercely realistic and pragmatic viewpoint rather than an overly optimistic one. So with the Stoics in mind, let's contextualize the global and market trends from 2022 and consider how it might help build toward strong outcomes in 2023.
Putting economics aside for a moment, in many global considerations, 2022 looked more like 2021 than many people would have liked. Covid hung around. The supply chain remained hobbled by kinks and missing links. We saw devastating images of the conflict in Ukraine on the daily news. Interest rates rose. Then rose again. And NASDAQ dropped. It's no wonder people were skittish. But we also saw progress in variable energy innovations, better-than-expected employment numbers, the resurgence of near-extinct animals like the rhino, significant strides in the fight against cancer, and the end of the civil war in Ethiopia.
Most pertinent to the context of this blog, let's look at venture investments and their impact on the startup economy.
We entered 2022 after a year of record-breaking venture funding in 2021. Through Q1, that deal-making activity slowed progressively, then dropped through the remainder of the year. The pullback in venture funding, rising inflation, and generally rough macroeconomic conditions created a challenging funding environment in 2022. During the first half of 2022, venture investing decelerated, particularly in the innovation hubs (Bay Area, New York, Boston). A long list of startups ran out of capital and had to shut down in 2022. Categories like quick commerce got hit particularly hard as VCs grew increasingly reluctant to invest in startups with high burn rates and low profits.
Not surprising anyone, fewer companies went public in 2022. EY estimated that there were only 992 IPOs (globally) during the first nine months of 2022, representing a 44% decline. Those that did go public raised $146B, which was a 57% drop YoY. And, of course, there were the layoffs. Twitter, Meta, Lyft, Stripe, Peloton, Masterclass, Apple, Amazon, and almost every other behemoth in the tech space 'right-sized' their teams in 2022. Crunchbase data at year-end estimated 90,000 people were laid off from U.S.-based tech firms.
We have a realistic sense of challenges. But let's consider how some of the challenging experiences in 2022 set up the innovation economy for long-term resilience. Let's look at how we adjusted and where we turned losses into learnings and wins, starting with the people. The tech and VC industries came together like the innovation community we are to support one another. The market is filled with more intelligence, experience, talent, and passion than you can imagine. Many, like BIP Ventures, have leaned in with talent resources and solutions like this one.
And to be sure, there were funding bright spots as well. While the funding dip impacted late-stage startups, institutional venture firms began to return to seed-stage and early-stage funding, especially in more stable, less cyclical sectors. The shift highlighted industries that matter most to the innovation economy, including Fintech, Healthcare tech, and SaaS. These sectors and the technologies that power them have greater potential for long-term growth.
The investment landscape offered some upside for careful founders and investors. Specifically, the large amount of cash that had been committed but not yet allocated (i.e., dry powder), plus a slowed rate of investing, enabled VCs to make investments at lower valuations, with increased liquidity preferences, better downside protection, and cumulative dividends. We confirmed that growth-at-all-cost and over-indexing in growth companies is a recipe for failure.
While doing so was painful, startups slowed spending to decrease burn rates and extend their cash runway. In effect, they slowed down to set themselves up to go farther. And we have seen in past economic downswings that survivors are rewarded with higher resilience.
We'll go ahead and say it. VC activity in the Southeast was a bright spot. If you read our annual report The State of StartupsSM in the Southeast, you know that the region maintained growth in deal activity and startup health, and the capital deployed continued on a record-setting trajectory. (If you haven't seen the report, hit Command + click on this link to open a new tab and grab the report, then come back to finish reading.)
Consider these highlights:
Investors poured a record amount of capital into the Southeast in 2021, and the momentum continued through 2022. Capital deployed by quarter continued its upward trend. Through the six months leading up to June 30th, more than $11.5B was infused into Southeastern-based startups. Post-money valuation increases attracted more investors to deploy capital in startups in the region. That trend fueled a virtuous cycle that attracted more startup success, which increased the average number of investors per deal. Bottom line, things in the Southeast remained pretty good. In general, success stories emerged and lessons were learned in 2022.
With that, we'll end this realistic, somewhat bleak, often positive look at where we've been, what we've learned, and where we're going. If nothing else, we'll have a good time returning to this time capsule in another 365 days to compare how far we've come.
Enjoy The State of Startups in the Southeast!
Thanks to Inside Startups, Inside Venture Capital, and CB Insights for rounding up so many excellent data points.
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