Dear Seedrs Investors,
As we approach the halfway point of 2023, we wanted to update you on how we see the market conditions in which we’re operating, the short term challenges posed by what is undeniably an inhospitable business environment and the long term opportunities we identify for both the European private equity landscape, and for investors on Seedrs.
Market conditions for private equity
It is clear that some of the obstacles we navigated in 2022 remain. Rising inflation, volatile public markets, the war in Ukraine and an international energy crisis continue to drive the UK and other countries towards the possibility of recession.
This turbulence has been reflected in private markets. As the economic downturn weighs on valuations, venture capital funding of startups has dropped by more than 50% year to date. Globally, VC firms invested $76bn into start-ups in the first three months of 2023 which is less than half the $162bn they committed in the same period a year ago, according to Crunchbase.
These worsening economic conditions have left many start-ups facing a choice between raising money at a lower valuation, taking on debt, or cutting costs to ‘make do’ until the funding environment improves. In practice, the vast majority of private businesses are opting to accept a reduced valuation at this stage of their growth journey. Take Stripe, for example, a great company valued at $95bn in 2021, completed a raise last month at the lower valuation of $50bn. Stripe is not alone and, as you will have seen, several businesses on Seedrs find themselves making similarly difficult decisions around valuation as they continue to attempt to scale this year.
It’s not just in market dynamics where early stage businesses have found cause for concern. Earlier in 2023 we witnessed the collapse of Silicon Valley Bank which further destabilised the funding landscape. The significance of such an event can’t be ignored and Seedrs, having played a prominent role in the EU startup ecosystem for 10 years, has rarely seen such a pivotal moment (that thankfully culminated in the successful sale of SVB UK to HSBC).
Long term opportunities
Despite these obvious near term challenges, that we recognise have material implications for some of the investments you have made on the platform, we remain bullishly optimistic that the long term fortunes for investing in private assets are strong.
Firstly, dry-powder (cash reserves kept on hand to cover future obligations) is at an all time high across the private equity industry. According to Lightspeed Venture Partners, this figure was almost $1.3 trillion for private equity and $580 billion for VC at the start of the year. This is the same level of dry powder the industry held in 2021 but, in that outlier year, VCs were also raising and deploying fresh capital at record levels. Altogether, these vast sums of available capital mean that the reported doom and gloom statistics don’t accurately tell the whole story for the funding prospects for the global startup ecosystem.
Secondly, we take confidence from the fact that some of the most generation-defining startups in history were built in recessionary times. Facebook, for example, was established in the shadow of the 2004 dot-com bust and, more recently, fintechs like Square were founded in the wake of the 2008 subprime mortgage crisis.
The reasons some businesses thrive in these circumstances are because, firstly, poor economic cycles benefit resilient entrepreneurs; secondly, starting a business in a downturn means there is a naturally reduced competitor set giving ventures greater scope to capture their key audience; finally, in turbulent times, companies often find a pool of available top tier talent who are able to help them supercharge their business. Ultimately, the strongest young companies will survive this downturn by scrapping a growth-at-all-costs mentality to focus on hardcore business fundamentals, especially positive unit economics.
We envisage that the businesses that will scale most effectively in these conditions and ultimately provide a return on investment are well represented in the businesses we’ve recently added to our platform like those playing a meaningful role in sustainability and building solutions to the challenges we face as a planet. This prediction is materialising itself both in terms of our campaign pipeline but also investor behaviour trends on the platform – ClimateTech thrived in 2022 with investment growing 154% from £15.7m to £40.1m, with 58% more businesses raising from 37% more investors.
We are confident that the market will pick up. Specifically, we are convinced that the Seedrs team has constructed a portfolio of strong investment opportunities for our investor community over the years. 90% of startups fail within the first year but 74% of the companies that have ever raised on Seedrs have either exited (going public or private sale) or are still trading and are facing these market conditions with renewed optimism.
We hope you found this analysis reassuring and useful. If you have any questions on the above, please email [email protected].
Jeff Kelisky, CEO, Seedrs