Startup investment fell in late 2022 amid recession fear: Crunchbase

The thought of a potential global recession may force you to cut costs. Startup investors do this too.

Fearing an uncertain economic picture, falling tech stock prices and growing fears of a recession, venture capitalists are holding back from aggressively funding startups. According to a new report from Crunchbase, in the final quarter of 2022, investment in North American startups fell by 63% compared to the same period last year.

In other words, if you’re among the growing number of Americans hoping to quit their jobs and pursue side hustles full-time, you might want to wait a while.

“A year ago, we wouldn’t have predicted we’d be where we are today,” Jeff Grabo, head of venture capital at global accounting firm Ernst & Young, told CNBC Make It. “There [were] There are none of the storm clouds on the horizon that have arrived through geopolitical instability, more localized inflation, and rising interest rates and recession fears.”

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Crunchbase suggested in a blog post another prominent factor behind the sharp drop: stock market turmoil that has driven down valuations of tech startups, frozen the market for IPOs and led to massive tech layoffs.

It’s not surprising to see such market volatility reduce investment in late-stage startups. However, early-stage startups also experienced a decrease in investor appetite, Crunchbase noted.

Notably, 2021 marked a record high for startup investments, with VCs spending $329.1 billion, according to Crunchbase data — so the significant drop in 2022 is still the second-lowest annual funding amount since the firm began tracking this statistic. .

But Grabo says the decline represents more than a temporary setback: instead, it’s a market reset that could lead to an even “softer” market for startup investments in 2023.

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“This business is a marathon,” he says. “You can’t rush it, and we’ve been sprinting for a while. So now it’s time to get back up to speed.”

Grabo notes that many investors expected inflation to come under control sooner, with a slight increase in interest rates. Instead, the Federal Reserve raised interest rates to a 15-year high, which helped curb inflation and temporarily hurt tech stocks.

As a result, VCs have pulled back significantly from 2021’s aggressive financing trends, Grabow says. Suddenly, instead of VCs competing to fund a hot new startup, that startup may struggle to convince investors to open their wallets, he adds.

Investing in 2023 isn’t going away entirely: Over the past two decades, a long line of successful companies have been launched in recessionary periods, giving VCs a track record of startups still worth investing in. .

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But if you don’t already have enough capital to survive the next two years — roughly how long many VCs expect this downturn to last, Grabo said — don’t count on getting a significant amount of outside funding for your idea. Any time soon.

“The hope is that in two years, we’ll get through the uncertainty … and you can come out on the other side and thrive,” Grabo said.

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