Where Is Venture Capital Headed In 2022?
Suzanne Fletcher is a General Partner at Prime Movers Lab, the world’s foremost accelerator for scientific breakthroughs.
Last year, my colleagues and I at Prime Movers Lab evaluated over 3,000 investment ideas, and we’re on track to do so again in 2022. We spent more than $400 million on transportation, energy, infrastructure, industry, agriculture, and human enhancement in the process. Every year, we conduct 25-plus squads, which are our internal teams that focus on specific technologies and topics, such as lithium, orbital debris, and grown seafood, to accurately deploy resources across so many developing areas. These teams’ efforts, combined with thorough monitoring of public and private markets, have prompted me to make a few predictions about where I think venture capital will move in the next months. Here’s what to look out for:
• Funds and companies hang onto cash longer. In 2021, more venture capital funds were raised and more startups were funded than at any other time in history. In the face of rising interest rates and uncertainty in the public markets, I believe companies who raised venture financing in 2021 will likely hold on to that capital for a little longer. Most venture funds will likely do the same, since investment periods and fund cycles, which had shrunk to 18 months in many cases, would likely return to a three-year cycle.
• Valuations come back into check. Over the last decade, the value of enterprise software-as-a-service (SaaS) and consumer app startups has continually increased. Early-stage companies that were formerly valued at $6 million are now easily worth $12 million or more; investment round sizes have increased to compensate and provide investors the requisite ownership. Given inflation, interest rate hikes are almost unavoidable. This should bring economic growth to a halt and valuations back down from their astronomical highs. Even as the macro situation grows more unclear, lower valuations should incentivize venture investors to continue to risk allocation. As a result, I don’t think the amount of money invested or the number of deals made will slow down very soon.
• Battery manufacturing will have an exciting year. Battery manufacturing will be one of the most exciting fields. With firms like Rivian going public last year, it was the year of electric automobiles. To facilitate the electric car transition, lithium battery output will have to drastically rise. Increased public scrutiny of how such resources are mined will dampen the euphoria over electrification (e.g., cobalt). This will increase demand for technology that make mining safer and more efficient.
• More mature, better-capitalized companies will go public. In 2022, I believe there will be fewer special-purpose acquisition companies (SPACs). The tremendous influx of SPACs, in my opinion, cannot continue after 2021, which was a record year. Taking firms public too early has been taught (or relearned, depending on how many cycles you’ve gone through). I predict startups to raise more money, including a Series D (or possibly Series E) round, and to remain private for longer periods of time. In 2022, cross-border, late-stage investors will have even more chances. Before bringing a firm public, early-stage and early-growth-stage funds will spend more time creating syndicates.
• Venture market becomes more decentralized. Beyond Silicon Valley, I expect that venture capital resources will continue to flow to a larger range of entrepreneurs. Great startups may be found in every corner of the country, and most don’t need to travel to Sand Hill Road to raise funds. “Zoom-only” first meetings have benefited both entrepreneurs and investors. Not only will new businesses be formed outside of Silicon Valley, but existing businesses will relocate to places with better business climates and lower living costs, such as Arizona, Texas, and Florida. This has already happened in our portfolio, with a team of 20 people packing up and going to Phoenix.
• Bio and health startups continue to garner attention. Last year was once again marked by the pandemic. I believe Covid-19 will become endemic in 2022, but entrepreneurs will continue to focus on enhancing human health. We are certainly in the golden age of biotech, as my partner, Dr. Amy Kruse, recently stated. While many firms claim to be working on breakthroughs that will change the course of history, just a handful are truly developing technology that could dramatically increase human lifetime. Because most biotech is capital-intensive and many businesses tend to go public with little or no revenue while their cures are in clinical trials, they’re likely one of the few sectors that will continue to gain from SPACs. According to Pitchbook, biotech and pharmaceutical fundraising activity skyrocketed in 2021, reaching a new high of $36.3 billion as of December 1. We expect innovative medicines, such as psychedelics, will continue to attract financial attention, in addition to digital health firms.
• Consumer values will drive corporate change. Consumers have more power than ever before, and they are speaking up. Throughout the year, corporations will be held to a higher standard of transparency and accountability. Consumers want their personal beliefs to be reflected in the items they buy and the companies they work for. I agree with Sophie Purdom and Kim Zou of Climate Tech VC when they say, “Carbon reductions provide for cheap recruiting marketing and retention.” I believe food-tech investing will have a good year as well. Increased investment is expected across the board, but particularly in seafood, which is cheap in contrast to market size and potential.
I’m looking forward to revisiting these at the end of the year to see how many of them have turned into reality.
ARTICLE: Forbes website