4 Reasons 2022 Will Be A Turning Point For Startup Funding
Last year, the startup funding landscape saw some significant changes that will have a significant influence by this time next year. Because interest rates were at an all-time low, there were few asset types that offered substantial yields (venture capital [VC] being one of the main ones). Investors poured in large sums of money, resulting in more than $600 billion being invested in the business. This meant that more money was chasing the same chances than ever before, resulting in sky-high valuations. Every additional traction proof point could result in a valuation of tens of millions of dollars at the time of a round.
As a result, startup owners began to reconsider their fundraising choices, revealing totally new ways to fund a company. Not to mention COVID’s impact. The global pandemic put some enterprises out of business, but it also had the unintended benefit of exposing entrepreneurs to new sources of funding.
The traditional paths of VC investment and institutional loans are well-worn and still have a place, but the number of solutions available that involve significantly less dilution and provide far more flexibility is rapidly expanding. Furthermore, now that interest rates are expected to rise, growth valuations are expected to fall. This means that companies will have to go above and above to justify their high valuations and demonstrate good fundamentals in order to raise at a greater valuation in the future. Every company is considering how to expand faster and for longer periods of time without having to raise financing.
If this trend continues (as our own company’s growth and client acquisition data indicate), I’m convinced that 2022 will be the year when ‘Alternative Financing’ is renamed simply financing.
We’ve worked with thousands of organizations and invested hundreds of millions of dollars in fast-growing recurring-revenue firms in the last year alone. We’ve witnessed personally how these businesses have navigated financing alternatives and the impact that the correct finance can have on a company’s growth. With this in mind, I believe 2022 will be a watershed moment in startup funding for the following four reasons:
Unicorns will start to lose their sparkle
Bootstrapping a business is now easier than ever. Other exits picked up in 2021, with M&A on the increase and continuing to set records. Startups are no longer laser-focused on achieving the unicorn prize. Other exits are growing more appealing, dwindling the unicorn population.
Furthermore, venture capital money is currently more expensive than it has ever been. Last year saw the largest investment in startups in terms of dollar amount rather than number of agreements. Mega-deals have become highly appealing (and subsequently super competitive for startups to achieve). As the value of venture capital expanded, so did the cost of that financing and the impact on founder equity.
As a result, many more people turned away from venture capital, either because they didn’t want it or because they couldn’t afford it.
Funding will be embedded
As funding is integrated into other areas of a startup’s financial stack, it will become entrenched, recurring, and programmatic. Unused funds, for example, will be able to earn interest in the startup’s bank account, lowering the cost of financing even more. Beyond the binary choice of VC capital or bank loans/debt, finance has developed to offer a better approach to finance firms. Though both have their place, new and complementary techniques can now help businesses earn fair returns on their excess cash and receive money fast and readily when they need it.
Large business expenses, likewise, should not obstruct expansion goals. Startups can now use alternative finance to spread out significant expenses like marketing, legal, and software services over a 12-month period. Startups can now define their own payment schedules and prioritize key growth activities. When these distinct finance approaches are integrated, they make financing more efficient while also lowering the total cost of capital.
Financing will be more frequent, for lesser amounts
Given the surge in VC megadeals and their impact on equity, I predict we will see a counter trend of founding teams seeking more fundraising rounds for smaller amounts to avoid dilution.
This will make funding more programmatic and require less time and effort than in prior years. Many businesses, in our experience, find it difficult to raise funds. They might not have the established network of contacts or just don’t have the time to fundraise, which can make the whole thing divisive.
Founders will be able to focus on what really counts – building their firm – as funding becomes more frequent and less dilutive.
The Wave 2.0
Vertical players became popular in the year 2021. This tendency will continue in 2022, resulting in a large amount of funding.
Data that was previously difficult to collect is now available because to the API economy. Because of this unprecedented data availability, we can now use historical data to create predictions about the future. Data generated or maintained in SaaS applications that collect data and automate workflows and marketplaces can be used to anticipate future performance and thus underwrite finance more intelligently. Financing for Airbnb hosts based on their previous visits frequency and scores, financing for Uber drivers to acquire new vehicles based on past business, scores, and tips, and even financing for electric bike fleets based on rides/mileage per day are all examples of this.
By having greater contextual data and the capacity to benchmark against thousands of comparable borrowers in real time, these verticals players will be able to compete with banks. In order to differentiate themselves, these same players will begin to integrate financial and software items into a single package with straightforward pricing.
Finally, if I had one piece of advise for founders, it would be to take use of different types of financing that place you in the greatest position to raise funds in 2022, based on our pooled insights from our customers – as well as our own growth. While VC money has its place in the funding cycle, it’s always better to develop quickly and raise later if you want to save as much equity as possible. And don’t we all as founders?
Raising funds later is usually preferable and will provide your company with the best prospects. Focus on the economics and analytics today, not on your funding. Make sure you have the correct product market fit and a clear value offer.
Don’t sell yourself short once you’ve established a good position to raise outside funding. When it comes to raising financing, one mistake we frequently see founders make is underestimating their leverage over venture capitalists. VCs and firms’ power dynamics have shifted. You must get something out of VC money since it will be the most expensive money you will ever receive. People aren’t leveraging enough, and they should consider what they need and want to succeed in 2022.
ARTICLE: StartupNation website