Startup funding continues to climb in 2022. On the back of Europe’s startup market success in 2021, experts predict that venture capital funding will soar in Q2.
With an unprecedented growth rate of 159% from 2020 to 2021, over $116 billion was invested into the European startup market last year, quickly addressing the post-pandemic startup boom amongst covid concerns.
(Image Source: Crunchbase)
In Europe alone, one-third ($40 billion) of all venture funding went to early stage startups and seed stage companies, while two-thirds ($76 billion) of all VC capital was poured into late-stage startups with a whopping 230% year on year growth rate.
As funding rounds multiplied, Crunchbase reported the best year yet for the Unicorn Board, after 84 startups reached their billionaire status in 2021, compared to just 11 in 2020.
In Europe’s first year surpassing the $100 billion mark for total startup investments, experts claim that the continent’s emerging tech sector has something to do with its success.
“It’s been a defining year for European tech,” claimed Atomico’s Insights Cheif, Tom Wehmeier. “I think what we’ve seen in the numbers is that European tech is creating value faster than ever.”
In the newest State of European Tech Report, research revealed that the total equity value of European based tech startups quickly surpassed the $3 trillion mark in 2021, the highest total the continent has seen.
“It took us decades to get to the first trillion in equity value in technology from Europe,” commented Wehmeier. “We got to that milestone only three years ago, in December 2018. And then we went from $1 trillion to $2 trillion in 24 months, and then this year, the most recent trillion has been added in eight months.”
Stepping into 2022, tech-based startups are tipped to do well once again, with fintech and AI-focused ventures dominating investment trends.
Why Does Startup Funding Matter?
Did you know that one-third of startup ventures fail due to a lack of funding or capital investment?
In a hot startup market, competition is at an all-time high. After the e-commerce industry grew by 35% in 2020 alone, online entrepreneurs continue to fight for their place within the startup playing field while balancing the impacts of global inflation and small business challenges.
In 2021, just under half of all startups in the UK, USA and Canada reported that venture capital investment was their primary funding source and their reason for market success within their niche.
However, as competition heats up, qualifying for VC funding continues to become a task for new startup companies on the block. In fact, according to Tech Crunch, startup ventures need to raise at least three rounds before even qualifying for Series A Funding.
According to the popular tech reporter, the average seed capital needed to qualify for Series A funding stands at about $5.6 million for a return of around $15.7 million in first round investment.
(Image Source: Findstack)
As funding rounds continue to increase and the average funding time gap between Seed and Series A stands at 22 months, a large number of startups are struggling to make ends meet in a 2022 market.
Did you know that over 20% of small businesses failed in their first year in 2021? As the startup scene heats up, and VC funding becomes all the more essential for online success, let’s delve deeper into the startup funding trends of 2022 and reveal what may be on the cards for both company leaders and VC investors in a post-pandemic startup scene.
Startup Funding Trends To Watch Out For In 2022
In the wake of the pandemic calling for wide-scale corporate digitalisation, the startup scene boomed. It is easier than ever before to start your own online business and more challenging than ever before to keep it afloat.
As aspiring entrepreneurs continue to rely on that all important capital, it’s time to pick apart the funding trends that they must follow if they want to be successful in 2022. From the impacts of inflation and a spike in hyper-personalised lending to a fintech led future, let’s dive in.
1. More Mega-Deals On The Cards For Europe
After Atomico’s yearly State of European Tech Report revealed that 2021 saw $100 million dollar mega-deals contributing to the $100 billion invested in European startups, early stage funding trends in 2022 predict a future of large scale capital investment deals within the tech sector.
In Q1 of 2022, we have seen a glimpse of what is to come, after $9.2 billion was raised by UK-based startups between just January and March – a whopping $1.7 billion more than Q1 in 2021.
France is not far behind too after French based start-ups raised $5.4 billion in VC funding in their own Q1 2022. Doubling their $2 billion funding total in 2021, Dealroom data has revealed that the country is tipped to see a spike in tech based mega-deals in the second half of the year, alongside other large European players such as the UK, Germany and Ireland.
Mega-deals also mean more unicorns for the European startup market. “Five years ago, you could fit all of the continent’s unicorns in a dining room and decry Europe’s missing tech giants,” claimed John Collison, Atomico’s State of European Tech Report President. “Today, you’d need an auditorium with 321 seats and you’d hear a completely different story.”
With more mega deals on the cards for emerging entrepreneurs, 2022 could see last year’s funding total double as Europe matches U.S results.
2. Inflations’ Impact On Startup Valuations
After inflation hit an all-time high in March 2022, with CPI rising to 7% for the first time since 1992, small business owners continue to face a challenging time ahead.
On the back of the global pandemic and the current Ukraine/Russia war, the worldwide economy has taken a hit that will send ripples across both the public and private market for the next decade.
From banks hiking up their interest rates to the rising costs of energy and fuel prices, small business ventures have become more costly to run and challenging to self-fund in the wake of the inflation crisis.
While startup valuations were high at the top end of 2021, 2022 will see investors playing the long game and pulling back on late-stage investments while the market is so uncertain. According to Mark Sherman, Director of Telstra Ventures valuations were already trending down in January after The Dow Jones Industrial Average fell by 7% and Nasdaq Composite fell 13.5%.
“If you are a special company, you are still getting the valuation you want,” he commented. “But I would say the more ‘meat and potato’ companies are probably down 20 percent in January-February in relation to November-December—some more, some less.”
While fundraising figures are down on average, startups growing at 3x or more currently have no issues raising the capital needed for Series A/Series B funding, however as growth investments become more conservative in response to market inflation, some small business leaders may struggle to keep their heads above the water in competitive sectors such as tech and finance.
3. Post-Pandemic Competition
5.4 million global applications for small business ventures were filed in 2021, a new worldwide record according to Census Bureau’s Business Formation Statistics.
In a post-pandemic corporate landscape, covid-19’s push for widespread digitalisation has made it easier than ever before to embark on your own startup journey as AI-based automation, globally remote connection and gig economy lies at the fingertips of any hungry entrepreneur with some spare capital.
The rapid growth of the startup market has quickly posed challenges for small business owners in competitive sectors. In fact, 43% of entrepreneurs now fear startup failure post-pandemic as fewer angel investors continue to make deals and identical startup visions rival for funding.
Covid-19 has not only made it harder for early-stage startups to stand out, data has also shown that post-pandemic valuations are down 10-40%, rendering the market even more challenging for small business ventures rivalling pre-pandemic giants.
“The VC landscape has certainly been impacted by the pandemic,” commented the director of Blumberg Capital, Bruce Taragin.“COVID-19 and the ripple effect of economic, social and professional impacts have rocked every industry, including technology, and the way investors look at new startups is inherently through a COVID-19 lens.”
As we step into a post-pandemic funding future, startups need to be ticking new covid-focused boxes that prove they can adapt to the challenges of the virus. Entering the flip side of the global lockdowns, investors are tipped to stick close to digitally inclined sectors such as fintech, crypto, and AI and companies with a strong ‘post-covid’ vision.
4. A Peak In Non-Dilutive Funding
Taking on equity investors is starting to play second fiddle to revenue based financing in 2022 according to the Financing Industry Report from Lighter Capital. In fact, a peak in non-dilutive funding in 2021 saw startups raising at least $15k monthly in recurring revenue, alongside gross margins of over 50%.
The question is, why has it become such a popular funding model? While taking on equity investors is the fastest track to financial success, startups can often lose their own voice when providing a VC investor with a seat on the board. There are both advantages and disadvantages of VC funding. From controlling business practices to ousting members from management positions, angel or VC interception may not always align with company goals during the early stages.
Non-dilutive debt based funding models aims to empower the voice of the startup entrepreneur, enhancing their goals rather than adjusting them. Debt based funding can also improve valuation, attracting VC funding at later stages.
In Europe, debt based funding increased tenfold in 2021, with a growth rate almost double of that in the US. 2022 will see new forms of non-dilutive funding jump out of the back seat and rival the success of venture capital. One funding option, in particular, that is set to become more popular post-pandemic is revenue based financing (RBF). Startup leaders who want to delay funding rounds can use RBF to protect company equity while supplementing dilutive financing methods.
The capital raising method that is currently growing at a CAGR of 61.8% between 2020-2027 benefits both startup authority and the investor as in exchange for investing capital, investors receive a cut of the startup’s gross revenue, providing higher returns than a number of dilutive funding alternatives.
5. A Spike In Female Funding
Female funding has also become a topic of discussion for VC investors in 2022. As the start-up scene continues to expand, so do the number of female-founded companies that aim to diversify the corporate landscape. While Europe saw over $100 billion invested into their startup landscape in 2021, only 1% of all capital investment went to female-founded companies and less than 25% was awarded to startups with a female on their board of directors.
According to a recent report from Morgan Stanley, VC firms that refuse to acknowledge the potential success of diversity within the startup scene could miss out on significant returns on investment in 2022. In fact, researchers found that if the representation of females within the global labour force matched the revenue given to female-founded companies, VC investors would be looking at a trillion dollar returns across the corporate sector.
The future however is looking up. As more female-focused VC firms rise up within the market, capital investment trends are diversifying in 2022.
“I do not believe in equality. But I do believe in equality of opportunity,” commented Anya Navidski, Founding Partner of the female-focused VC firm, Voulez Vous. “As Europe’s first VC for female founders, that’s exactly what we provide to our female founders. We level the playing field.”
6. A Fintech Led Future For VC Investment
Like 2021, 2022 looks as if it will be hot for fintech. With more global VC funding than any other individual sector, fintech continues to dominate startup investment trends post-pandemic.
(Image Source: Silicon Valley)
Covid-19’s digital shift has bought financial technology into the limelight and spiked VC interest in fintech-focused startups. In fact, 2021 saw fintech startups receive 18% of global capital investment and 14% of all VC based deals.
In total, fintech startups were able to raise a whopping $132 billion in funding in 2021 alone, up 169% from $49 billion in 2020.
2022 looks no different. As financial tech firms continue to revolutionise B2B services, healthcare and banking, a post-covid landscape is becoming more digitalised by the day. VC investors will be looking out for new innovative fintech and AI based opportunities in 2022 and won’t be hesitant to seal mega-deals during early stage funding for some pretty hefty returns.
7. Taking Advantage Of Asset Tokenisation
Last year, we saw a spike in NFT popularity across the globe. Trading in non-fungible tokens increased by 21,000% in 2021, catching the eyes of both startup entrepreneurs and venture capitalists.
As digitally driven entrepreneurs continue to link their capital assets to blockchain-based tokens, investors are beginning to seal tokenisation deals with startup firms, placing a stake in the NFT rather than the company itself. Participating in a liquid landscape, asset tokenisation reduces investor risk and promotes a transparent funding exchange with a high chance of return across a secure blockchain.
“When we think about buying NFTs, it’s in line with our investment strategy, which is thinking about investing in things that have the potential to return many, many multiples of the fund,” commented Ophelia Brown, managing partner of Blossom Capital.
2022 could be the year of Security Token Offering (STO). Offering a new startup funding option for entrepreneurs in a crypto-based industry, STO provided startups with wider access to a global VC landscape, while providing investors with increased security in the form of security tokens that VC firms can trade and liquidise whenever they like.
8. A Rise In Sustainable Funding
Environmental, Social and Governance (ESG) investing peaked in 2021 on the back of COP26’s call for net zero in 2050. With a cleantech startup boom on the horizon and a post-covid momentum pushing a sustainable future into the spotlight, there are enormous opportunities emerging for venture capitalists to invest in sustainable startups in 2022.
There is currently $12 trillion dollars worth of market opportunities associated with achivong the UN’s Sustainable Development Goals in the next decade, involving the creation of clean technologies, climate change initiatives, healthcare innovation and agriculture.
VC investors that chose to invest in line with SDGs will be sure to see high returns while also contributing to a greener future.
ESG investing took off in 2021. After increasing by 61% in just the first half of the year, sustainable venture funding is tipped to double in 2022 as more sustainable startups emerge across the globe.
(Image Source: Black Rock)
As you can see here, sustainable investing trends show no signs of slowing down in 2022. Predicted to hit just under $2 trillion in mutual funds by 2028, business leaders with a sustainable startup vision should act now if they want to see some large scale VC attention.
In the UK alone, there are now over 900 impact based startups that aim to tackle global issues such as climate change, with over $50 billion of combined VC funding. 12 of these have already reached their unicorn status, and we expect that many more will join them in the second half of 2022.
9. Addressing The Crypto-Flop
The first quarter of 2022 looked promising for crypto-based startups. Funding patterns were high and new data from CB Insights revealed that crypto-focused ventures raised more capital than ever before as investors made mega-deals across the globe.
However, in May 2022 that all came crashing down. On the back of one of the globe’s largest stablecoins, TerraUSD (UST), falling 70% to $0.2998 alongside its sister token, Luna, both crypto investors and crypto startups will spend a large portion of 2022 recovering from the collapse.
Large VC investors have already pulled back on startup investments in response. SoftBank for example reported that they were pulling back by 50-75% on their annual startup investments in the wake of the firm losing billions in tech investments.
Tiger Global is following the same path after losing a whopping $17 billion in the crypto crash, alongside a number of other large scale VC firms.
The question is, what does this mean for crypto-startup funding in 2022? Expats at Protocol predict that the firehose of funding could be up to 80% smaller while investors recover and small businesses could face valuation challenges in response.
However, in terms of the investing industry, crypto experts believe that the crypto crash could be a learning curve for the future, shaping new 2022 crypto trends in Q3 and Q4 of the year.
“It’s both a good and a bad thing,” claimed Wendy O, the popular TikTok crypto expert. “Crypto correlating a little bit more with the stock market is good for average investors because they can utilize that information to make better trading or investing decisions. But at the same time, we want to keep crypto as decentralized as possible.”
10. A Digital Future
Startup funding has a digital future. As the popularity of blockchain and fintech based money movement continues to prosper post-pandemic, it won’t be long before all capital investments are funded through decentralised frameworks that aim to improve cross border money movement and improve both company and investor security.
Fintech also continues to facilitate a digital future for VC partnerships, after Fintech Magazine recorded a 72% rise in fintech use in the public and private markets post-pandemic.
2022 will be the year of digital innovation within the startup funding industry. VC investors will have a strong focus on AI, clean tech and corporate tech based investment and startups will continue to improve their own digital skillsets in order to keep up with the increasing competition.
While a post-covid future may still be uncertain for many new entrepreneurs on the block, it’s clear that both dilutive and non-dilutive funding trends are on the up and will continue to gain more traction as the year progresses.