There is no denying the technology sector is experiencing a temporary slowdown, with less venture capital flowing into start-ups and many VCs pushing the pause button. According to data from research firm PitchBook, $272.55 billion of venture capital was invested worldwide in H1 2022, second only to H2 2021 when $336.38 billion was invested.
However, preliminary Q3 data shows that just $89.3 billion has been deployed, making it the lowest quarter since Q2 2020.
The key question is: how much of the slowdown is due to macroeconomic trends and how much is attributable to factors within the industry itself? Looking at the unstoppable growth trajectory over the few years, we can be confident the answer is the former.
These are uncertain times, so now is a good time to look at what we have learned through previous downturns and recoveries, to predict what might happen next. Prior recessions generated pioneering start-ups such as Airbnb and Uber out of the global financial crisis, or Disney from the Great Depression. Research shows the best venture returns were generated in fund vintages actively investing in times of correction, when valuations dialed down to conservative levels and innovation was rising.
Despite macroeconomic headwinds, forward-looking investors with long-term strategies should not stop looking for that next category-defining tech start-up. Some of the early-stage start-ups tinkering away with AI, machine learning, blockchain and robotics will break from the pack and emerge as the super brands of the 2020s.
Encouragingly, given the record levels of VC fundraising witnessed over the past 18 months, there remains considerable capital which will be put to work once market conditions stabilize. PitchBook reports that ‘dry powder’ in the pockets of VCs stood at a record $290 billion in the US alone at the end of H1 2022.
Ultimately, venture capital has a long-term horizon, usually over 10 years. My view is that market turmoil that may last a couple of years will not materially impact long-term returns – if you back the right companies at the right valuation.
Many start-ups transforming the built environment are focused beyond bricks and mortar and are tackling some of the most crucial social issues of our time, such as the climate crisis, the housing crisis, business resilience and the health and well-being of our communities and cities.
There are also clear signs that the sector is maturing, not just with more and higher value later-stage funding rounds, but also with the increasing number of generalist VC investors and institutional investors starting to invest in the space.
The perfect case for this is Plentific, a portfolio company from our second fund. In 2016, Pi Labs invested in Plentific’s £2 million ($2.26 million; €2.29 million) seed round, followed by a follow-on investment in its 2017 Series A. Last year, it closed its $100 million Series C round. This is European proptech’s largest full-equity VC round to date, rivaled only by debt financing, IPO and post-IPO activity in the sector.
Ultimately, we believe this cycle is an opportunity for the market to adjust in terms of valuations, for better VC practices and business discipline to be introduced, and for top companies to stand out. We must remind ourselves of the lessons learned from history – that funds that invest at a time of correction tend to perform better.