Fernway DiarySM

May 18, 2022

The beginning of 2022 brought signs of a shift in the global venture capital market amid factors generating uncertainty in the financial market at large. The Russia-Ukraine war, rising inflation and interest rates, continuing COVID-19 issues in various parts of the world, and ongoing supply chain difficulties have fueled turbulence in capital markets worldwide, contributing to increased caution and a slowdown in dealmaking. As a result, global venture funding fell from $184 billion in the fourth quarter of 2021 to $160 billion in the first quarter of 2022, according to data from Crunchbase.

This 13{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} quarter-over-quarter decline marks the first time that startup capital investment fell from one quarter to the next after a year of funding records. However, comparison with recent figures shows the first quarter of 2022 exceeded the corresponding quarter in 2021 by 7{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} and exceeded every funding quarter in 2020, demonstrating that VC investment is still at a high level. With global venture capital soaring from $335 billion in 2020 to $669 billion in 2021, the dip in the latest quarter may not be a sign for alarm yet, but rather a cooling off from an overheated funding environment.

Where the Impact Was Felt

During the first few months of 2022, the greatest downturn was seen in Series A and B rounds, which fell to $51.9 billion, 18{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} lower than the previous quarter. Late-stage funding (Series C and higher) declined to $97.9 billion, a 12{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} dip. New unicorns, private firms valued at $1 billion or more, were lower on both a quarterly and annual basis, numbering 129 compared to 146 in the last quarter of 2022 and 132 in the first quarter of 2021. The exception to the trend was seed funding, which posted a modest rise to $10.3 billion, up about $200 million from the quarter before.

In an environment where additional funding rounds may be harder for startups to obtain than in the past year, investors and other industry leaders are advising startups to consider reducing spending and conserving cash to extend their existing runway. In a sign that some prominent startups are making aggressive moves to reduce their burn rate, several have made significant layoffs recently. These include mortgage startup Better.com, which reduced its headcount by half from 10,000 to 5,000; edtech startup Unacademy, which cut 1,000 jobs; and automation software firm Hyperscience, which laid off 25 percent of its employees in March. However, large layoffs have not yet become a widespread trend.

For startups that have already taken a conservative approach to managing spending, such drastic measures may not be necessary. However, it is expected that companies may scale back on hiring in general to keep fixed costs lower, and what hires they do pursue will be strategically chosen to bring long-term benefits to the startup. The cost-cutting moves many startups made at the beginning of the pandemic, shedding expenses for office space and travel as lockdowns prompted a rapid transition to remote work, will continue to work in their favor should the current slowdown in funding continue. In general, experts are advising startups to stay the course. This includes making sure general, administrative, and R&D costs are in line with their industry; seeing that marketing and sales teams are hitting their quotas (where applicable); and keeping a close eye on cash spend without throttling growth.

Adapting to Change

In the coming months, investors are expected to proceed with a degree of caution. Growing startups are encouraged to exercise greater care towards demonstrating sound business planning, strong financials, cash flow and corporate governance to potential backers.

Corporate and financial due diligence, tax and regulatory compliance, are anticipated areas of emphasis. Timely advice can help startups effectively adjust to and navigate around changing market conditions. Fernway Solutions offers a full range of advisory, corporate structuring, tax planning, compliance, and accounting services to assist startups at each stage of their growth.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com.

Disclaimer:

The above content is intended to support the marketing of professional services and should not be construed as written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular tax situation. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this content is not intended to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Fernway Solutions assumes no obligation to inform the reader of any such changes.