At the beginning of 2022, the PIUS team met with a company that had been planning to go public via special purpose acquisition company (SPAC). While SPAC transactions were rampant in 2021, 2022 is telling a different story. As the SPAC market dried up, the company was looking to alternative financing solutions. Anecdotally, we’ve seen this trend continue throughout the first half of the year and beyond, with a steep decline in companies pursuing SPACs and IPOs compared to last year.
In recent months, much news in the technology community has been on venture capital’s down market, making it more challenging for startups and growing tech companies to access capital through VCs and causing a rise in companies seeking non-dilutive debt capital.
Both venture capital and capital markets have seen a major slow-down as we face economic uncertainty and valuations correcting after years of overestimation. Technology companies have a handful of options when seeking growth capital. Yet with these new challenges and market changes, the options are further limited by a number of business and market dynamics.
Traditional venture capital has faced its largest drop in nearly a decade, having fallen 23% in Q2 2022. On the heels of the startup funding boom of 2021, and amid new economic uncertainty, valuations are right-sizing, and investors are heeding caution. VC hasn’t completely dried up, however, and VC dollars are still available for certain types of companies – primarily early-stage. In fact, late-stage technology companies saw the steepest decline at 40%.
While no stage or sector is immune to the drop in VC funding, the seed stage has been most resilient, with early-stage investments making up 64% of global deals so far this year. At this stage, most companies are looking for purely venture capital and aren’t considering debt. From the investor perspective, earlier stage companies are typically looking for smaller amounts of funding, and there is more control over the valuation. Likewise, investors can do more deals in seed-stage or early-stage companies, and can be more competitive, even at smaller amounts.
For later-stage technology companies, it’s more typical to go public via initial public offering (IPO) or a SPAC in order to generate capital. While there have always been pros and cons to going this route, rising interest rates, inflation, and economic uncertainty are pushing this further into the “con” column for many companies, and IPOs and SPACs have also declined over last year’s record numbers. In the first half of 2022, SPAC transactions have only reached $10.45 billion, compared to $148.75 billion for all of 2021. IPOs have seemingly fallen even further, with $3.17 billion raised in H1 2022, compared to $115.94 billion in 2021.
Because later-stage companies would typically pursue a SPAC or IPO, and because venture funding is primarily flowing to early-stage companies, more established businesses have been most impacted by the decline in equity financing. Likewise, these later-stage companies are most likely to be able to support debt through operations and are increasingly pursuing alternative financing options. This creates an interesting dynamic, the companies most likely to be able to support debt are those feeling the greatest impact from equity markets drying up and are thus the most likely to seek this funding option out. Though interest rates continue to rise, debt remains a valuable option for high-growth technology companies in need of funding.