Navigating venture capital in 2022

Ahead of SuperTechnology North America 2022, Rudina Seseri, Founder and Managing Partner of Glasswing Ventures, examines the state of the North American venture capital market and key characteristics in the approach of winning early-stage VCs.

Navigating venture capital in 2022

The North American venture capital market has been a top-performing asset class over the past few years, especially at the early stage. Apprehension over interest rates and inflation, along with global uncertainty spurred by the tragic events in Ukraine, have some investors in a “wait and see” mode. However, the amount of capital raised by VC funds in the past two years is still being deployed at pace into companies redefining enterprises and markets. At Glasswing, we see this hold true in AI and frontier tech, where we invest at the earliest stages.

Private equity firms, sovereign wealth funds, and hedge funds have competed for the same opportunity sets in the past two years, causing valuations to reach record highs. Growth investors made earlier investment opportunities in the hopes they would not miss out on the next unicorn. This activity was fueled by the asset class’s massive growth and unparalleled returns. As a result, venture capital continues at a record monthly pace with over 40 unicorns funded and billions of dollars invested in seed per month. However, the new year has added new layers to these dynamics with double-digit correction in growth stocks in the public markets and, most recently, conflict in Europe.

As a venture capitalist for the past 18 years, I have seen disruptive technological innovations and have been through some turbulent financial cycles. But today’s investment market for startups is particularly fascinating. The combination of significant dry powder in the private markets alongside economic and political volatility has created a unique opportunity for disciplined early-stage investors.

The strength of founders, the rate of innovation, and the opportunities to create immense value are unparalleled and will continue to make venture capital a top asset class for allocators. Catalysts like supply chain disruptions, data privacy regulations, and the fundamental changes brought on by the pandemic have set the table for a new decade of innovation. The capacity to generate new wealth is as strong as ever. Still, like today’s startups, investors will also need to adapt to maximize returns. GPs will need to adjust their strategies and focus on delivering value to their portfolio to achieve this strong performance.

Money in the Markets

VC fundraising eclipsed $100B in a single year for the first time ever, with $128B raised in 2021, up from $87B in 2020, according to PitchBook. Despite a cooling off in the public markets, the 2022 outlook for capital deployment is bullish, with venture capitalists having record fund sizes to back founders.

According to Pitchbook’s Global Funder Performance report, venture capital as an asset class has outperformed every other private capital asset class on a 1- and 3-year IRR basis, including private equity, secondaries, real estate, real assets, private debt, and fund of funds. Based on my market view, this outperformance will continue, and LPs will continue making substantial allocations to the asset class.

For venture capitalists, the investments are there to make. An estimated 17,054 deals were made in 2021 – a big jump from 12,173 in 2020. Looking at my firm’s pipeline, the number of pre-seed and seed-stage companies is increasing dramatically. At Glasswing, we have seen 2x growth year over year in the number of highly qualified companies for funding.

With so much capital in play, VC activity will remain elevated but also put pressure on startups to demonstrate high-velocity growth in a rapidly changing market.

Impact on Startups

When it comes to startups, strong performers in the market will continue to garner the attention of VCs and raise significant funding rounds. The record inflow of capital plus increased pressure from market velocity equals a situation where later stage investors take a “fund the winners” approach to investing in which tens or hundreds of millions are poured into market leaders. While this presents an opportunity for early-stage companies and their investors, the dynamic can increase emphasis on and reward for fast growth at all costs. While the negative consequences of “growth at all costs” are seen in recent significant layoffs in growth-stage startups, top performers are securing larger rounds closer to each other, growing faster than ever.

This has ramifications for both VCs, which want to help young companies achieve their maximum potential, and startups, which are aiming for fast growth but may hit obstacles along the way. Early-stage VCs specifically need to design their fund offerings around helping founders create robust and sustainable foundations to build hyper-growth companies. Preparing founders and companies for the demands of current market dynamics begins at the seed stage. Teams that set themselves up for success early, “cross the chasm” from seed to Series A, and balance efficient and rapid growth will be in pole position to become market leaders.

VCs Need to Tailor Their Approach

In this environment, a key characteristic of winning early-stage VCs is tailored offerings for the unique needs of young companies “bridging the gap” and finding product-market fit. This becomes particularly important given the current market dynamics, where a company must be built upon excellent early execution. A tailored approach includes:

• Well-run customer discovery and tight feedback loops to hone product-market fit
• Tactical hiring of the earliest employees and sustainable onboarding
• Specifically relevant expertise to supplement inevitable blind spots in small teams at the earliest days
• Formal advisors and domain experts that build credibility, guide product, and deliver qualified potential customers to the table
• Highest-quality follow-on investors for Series A and beyond
• A peer network who can understand first-hand the early founders’ experience

We have built our platform at Glasswing with these facets, armed with the knowledge that this approach delivers the right combination of resources that enable startups to effectively tackle this ultra-competitive market. In today’s environment, GPs must clearly articulate how they can help their portfolio companies jump from zero to their first few million in ARR and establish a strong foundation for long-term growth.

Market volatility and continued uncertainty in the geopolitical world will impact investment plans and funding prospects for innovative frontier technology startups. That said, the investors who adapt and build platforms designed to help startups succeed will be rewarded with strong returns in 2022.

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Under the spotlight: Rudina Seseri

For more exclusive insights, from Rudina Seseri and other industry leaders, be sure to join us at SuperTechnology North America >>

Image credit: Vitalii Vodolazskyi via Adobe Stock Image