Early-stage venture capital firms are doubling down on investments in 2022 despite a sell-off frenzy in public tech stocks and growing scepticism of growth-focused tech valuations.
Market turbulence this year has rocked tech investment heavyweights like Japanese titan SoftBank, which has written down the value of its private investments and reported a $26.2bn loss in its flagship Vision Fund, as tech stocks plunge amid soaring inflation and market volatility sparked by war in Ukraine.
But early-stage venture capital (VC) investors, which typically have a longer exit timeline than late stage funds and do not rely on the stability of public markets, say they have weathered the worst of market turmoil and are poised to keep pumping cash into firms.
“When I think about how the turbulence has impacted us and our portfolio companies, markets will be a little bit tighter, money will be a bit harder to raise and we have adjusted our strategy accordingly,” Nic Brisbourne, founder of London VC Forward Partners which has a portfolio of 65 firms worth £108m, told City A.M.
“But venture doesn’t necessarily correlate with listed tech, and that correlation is weakest in the early stage, while the exit is still many years away.”
London-listed fintech venture firm Augmentum told City A.M. today that markets would start to “normalise” this year after a frenzied year of investment last year, but early stage venture would continue to surge.
“Augmentum has been careful to not get caught up in the competition for exposure at any price. But early stage VC, in particular in fintech, will remain heavily in demand amongst investors,” boss Tim Levene told City A.M.
“Valuation inflation at the growth/pre-IPO stage grew at unsustainable levels despite the fact that these companies typically grow at a much slower rate than earlier stage tech companies. “
Investment analysis firm Pitchbook found this week that early stage VC rounds had remained buoyant in the first quarter of the year following a record breaking 2021, with funds largely undeterred by economic headwinds in the first quarter of the year.
Angel, seed and early-stage valuations in the UK & Ireland trended above 2021, with the median valuation hitting €7.8m through the first three months of the year – 28.7 per cent higher than 2021 – while late stage valuations dipped from 2021 levels.
Henry Whorwood, head of research and consultancy at data platform Beauhurst, told City A.M. that volatility showed no sign of hitting UK early-stage tech firms yet.
“Our latest analysis including 2022 shows a continuation of the trend – increases in average valuations with it being most pronounced at the growth-stage,” he said.
“We’re not yet seeing what’s happening in public markets (and indeed US private markets) trickle down to UK tech companies.”
He warned of a potential lag effect however, as market shocks and rising interest rates begin to deter the flow of capital later this year.