Startup Funding: Size and Sentiments in 2022

The world economy is under stress due to the current geopolitical situations, such as the Russia-Ukraine war, the collapse of the Sri Lankan economy, and rising inflation. The startup market is also coping with the emerging situation. Such developments do make a dent in positive sentiment in the ecosystem. However, the VC firms foresee a positive idea in the second half of 2022 as the early growth investments continue to dominate startup funding globally, and India still presents a positive growth trajectory.

The Shining Sectors

In 2022, some startup industries will stand out because they continue flourishing. The shining sectors pertaining to VC funding include

Cybersecurity

Industries working on cybersecurity were at the height of the venture market this year. A record amount of venture capital was raised by the sector, and unicorns seemed to be created every week. Cybersecurity has given birth to more than a dozen new unicorns in the first six-plus months of this year, even as the venture market has flipped. Several VCs made specific note of startups in the DevSecOps sector—where security is integrated into the software development process—cloud security, and any technology related to identification and authentication last week at the RSA Conference in San Francisco.

Biotechnology

The downturn in venture funding has not particularly hurt the biotech industry. In the first five months of this year, financing for biotech startups hit a global total of nearly $24 billion. That is expected to be significantly less than the record-breaking annual sum of about $72 billion in 2021. However, if funding proceeds at the current rate, the annual investment may potentially surpass the $49 million mark in 2020. Large rounds have also been completed this year. In the last several weeks, two of the largest rounds were disclosed: Ultima Genomics, a company that creates low-cost sequencing platforms, closed on almost $600 million, and Resilience, a company that offers biomanufacturing technologies, raised $625 million in Series D funding.

Climate Technology

Even as venture investment overall declines, software businesses focusing on the environment are raising significant amounts of money recently. A Crunchbase sample set of 27 businesses funded in the past year or so have received over $1.6 billion in funding. More than half of the money came in 2022, demonstrating a resurgence in investor interest in the climate software market. The regrettable fact that climate news is getting worse is another factor causing fundraising to increase. Climate change is causing an increased sense of urgency among investors who follow the subject most closely, from droughts and heat waves in the American Southwest to record arctic temperatures threatening to hasten glacial melting.

Real Estate

The real estate technology industry has held up well, even outperforming the previous year, which was exceptional. According to Crunchbase data, entrepreneurs in the real estate sector have raised roughly $12.4 billion so far in 2022, up from about $11.4 billion at this time last year. These businesses include everything from real estate financing firms to startups in construction technology. Despite the general decline in VC investment, there are numerous reasons for the sustained interest in property technologies. For starters, more workers, even part-timers, have resumed working in offices. Additionally, more discussions are going on concerning sustainability. Construction and the labor shortage in the industry are still heated topics.

India and Series A Startup Funding

The Indian Startups continue to offer huge opportunities to Venture Capital investors with their high growth potential and large market penetration. For example, the Indian internet market valuation fetches a three-time more premium over global valuations. Hence, at a time when a VC firm invests in a particularly successful and growth-oriented startup, it aggressively publicizes its investment. Such publicity exercises help create a positive sentiment for venture capital investment in the startup ecosystem.

The world's leading VC firms, such as Tiger Global Management, Sequoia Capital India, Matrix Partners, and Accel, Meanwhile continue to invest aggressively at early stages and have also enhanced their largest-ever funds for Indian startups this year, suggesting that early-stage investments in India will continue to surge. Tiger Global has raised its Series A bets in India this year as the country's ecosystem for early-stage funding startups appears to be gaining steam.

According to energy journalist, Robert Bryce's estimation and an updated estimate of the world's GDP of over $90 trillion provided by the World Bank World Development Indicators, the current worth of the global energy market is more than $7 trillion. A third of this is made up of electricity. It is statistically impossible for solar, wind, and hydropower to provide all of the world's energy needs, let alone the transition to cleaner electric vehicles and the next few billion people. Undoubtedly, the world requires a tremendous quantity of renewable energy, but the US only produces 9% of its electricity from wind and solar, according to the Energy Information Agency. In the last 60 years, the environmental effects of burning coal and natural gas to produce power have been orders of magnitude greater than those of clean energy. Advanced technology can make it possible to produce energy that is zero-carbon, secure, and extremely resistant to proliferation without requiring massive, multi-year, multi-billion dollar construction projects. This innovative approach to energy generation can empower the entire planet when combined with a greater reliance on renewable sources.

For Series A funding, the average round size of Tiger Global increased from $20 million in 2020 to 25 million in 2021, and now it is $40.2 million in 2022. This shows that an upward trend continues in the Indian startup ecosystem. Similarly, another giant tech investor in the Indian startup ecosystem Sequoia Capital India has also been increasing its early-stage investments. The company has now been investing at the seed level through 'Surge' – a startup accelerator Program, and the size has been raised to $3 million.

The Road Ahead

Startups with high burn rates and short runways that planned to go public this year are also having their ambitions derailed by the current liquidity crisis. In India, Oyo, which pre-filed its IPO filings last year, is rumored to have postponed plans to go public in 2022 or to have agreed to a lesser valuation. On the other side, unicorns like DealShare and Xpressbees are conducting business as usual. The former claims to have a comfortable runway of roughly 2-3 years and has raised $390 million to date. The startup intends to achieve profitability and go public within the next two years.

Growth-stage startups will have to extend their runways by up to 30 months and move slowly due to smaller check sizes and a lack of new funding. (Startup runway refers to the number of months your company can continue to make money before running out.) The startups that got funding in 2021 are now leveraging the sentiments and would be in a better position to runways from 18 to 30 months. The real challenge falls on startups that have dried out their capital (cash burns) and will now have to press some reset buttons.

Overcoming global challenges posed by geopolitical situations and economic forces, with high valuations, public market listings, international expansions, fierce competition, and maturation ratios, startups are expected to grow at a higher rate in the next four months. The fundamentals are the key to success, and startups that utilize this critical time to strengthen their valuations with fundamentals are poised to take a big leap forward in terms of VC funding. It is widely known that some of the most valuable companies of the previous generation—Airbnb, Uber, etc.—were founded around the time of the 2008 financial crisis.

Overall, the size of India startup investment so far manifests that both VC firms and founders have been trying to leverage the benefits of the current sentiment. Hence, a 'win-win situation' would dominate the investment market going forward.