Venture capital (VC) firms are continuing to pour money into tech firms even as startups consider alternative funding mechanisms. According to a report from Pitchbook, this trend includes a record-breaking increase in pharma and biotech investments. Business-to-business (B2B) tech, business-to-consumer (B2C) tech, and FinTech maintain the momentum that began in late 2020.
Will Venture Capital Firms Investment Spree in Tech Continue?
It certainly seems like a great time to be part of a tech startup.
Wave Capital Partners, an investment banking consultancy that advises tech companies on raising capital, believes the trend will continue into the near future. However, they are quick to acknowledge some concerns about inflation and other factors.
Recently, Garrett Boorojian, managing partner at the firm, participated in a question-and-answer session on this very topic. Boorojian’s insights appear below.
Tech VC inflows have been very strong this past year. Do you see that trend continuing into 2022?
Absolutely! Tech venture capital is a necessity, and the trend of VC investments will continue in 2022 and beyond because “the now” is also “the future.”
Most tech-based companies
In no particular order, Washington state, California, Texas, Florida, North Carolina, New York, Georgia, and Michigan are the U.S. states that most tech-based companies call home.
Diverse tech endeavors
The tech VC space serves a major, perpetual, and holistic role for funding diverse tech endeavors. Launching start-up and early-stage businesses that make positive and life-changing differences in society is the essence of entrepreneurship in any industry, including in the tech world.
The tech VC space also provides the vehicle for scale-up growth of a product, a service, an application, a type of software, a medical device, or any other tech-related capacity. Today’s tech VC investments will create new supply to meet tomorrow’s new demand in the industry.
Right now, what are the areas of tech that VC investors seem most interested in?
Lately, PropTech and FinTech. Other areas where investors have significant “evergreen” interest are in technology that encompasses healthcare, energy, artificial intelligence (AI), information technology (IT), cybersecurity, augmented reality (AR), the internet of things (IoT), and consumer-based products and services.
Technology — the central component
As long as technology is the central component, business models of tech start-ups and early-stage companies must demonstrate all the necessary elements that attract the right tech VC investors to be the companies’ early financial backers.
Strong exec leadership
Suppose investors see that a particular tech-related company has the potential to go public in the future, in addition to its needs for capital and other value-add resources and expertise to grow. In that case, strong executive leadership and advisory board teams have to be running and advising the company from the outset.
What is drawing investors to FinTech and PropTech above many other areas?
Investors are drawn to the practicality, functionality, and monetization of methods and systems that tech companies can provide to consumers on national and global levels. Specifically, investors are aware of the continuous modernization through technological breakthroughs in the worlds of real estate and financial services.
Better ways to manage, save and spend money
Investors, including VC investors, hope to deploy capital in these tech areas if there are indeed smarter, more efficient, and more innovative ways for consumers to live, work, and play. They also want to invest in better ways to manage, save, and spend money.
User-friendly platforms in tech
The accessibility quotient affects how quickly and successfully consumers can connect to user-friendly platforms in a thriving tech environment. It can help to remember that investors in FinTech, PropTech, and other areas of tech are consumers as well.
What macro factors do you see influencing the availability of capital over the next 12 months?
If inflation continues to rise, the Federal Reserve may raise interest rates twice by early 2023. Legislation that U.S. President Joe Biden eventually signs into law will also dictate the availability, or lack thereof, of less expensive capital over time.
Startup founders look for available capital right now
Start-ups and early-stage companies should get in front of VC and private equity (PE) firms simply because capital is available right now. Entrepreneurs in need of VC investments into their businesses can’t allow themselves to think that the money at a cost that’s attainable now will always be there six to 12 months from now.
Entrepreneurs must keep expanding
Thankfully, the economy is still growing strong. Labor and material shortages still exist, but everyone’s hoping that both of these dire situations will be resolved soon. Suppose interest rates rise in the future. In that case, inflation will decrease, but it should not get to the point where companies get deterred from hiring key people to help run and lead their entrepreneurial enterprises. Our economy can’t afford to have its entrepreneurs stop expanding their operations or at least be hesitant to take on more VC or PE capital, or debt of any kind, in critical moments of growth in their businesses.
Also, from a macro perspective, natural disasters and other unpreventable life-altering events could restrict access to capital and affect anyone’s financial portfolio on Wall Street or Main Street.
Could rising rates or tax reform lead to a tightening of VC availability?
Yes and no. The Biden Administration proposes an increase to the tax rate on long-term capital gains for Americans making more than $1 million and the corporate tax rate and ending the carried interest loophole.
There’s a division that relates to the overall hypothesis within the VC community of whether or not these proposed changes will slow down VC investment.
Capital gains tax rate increase?
Along with PE groups, many VC firms who supported President Biden during his presidential campaign oppose the capital gains tax rate increase. They believe this increase will hinder long-term investment opportunities and slow down economic growth while our nation tries to recover from the pandemic.
Others in the VC world — although in the minority — believe these legislative proposals won’t stop investments in start-ups and early-stage companies if enacted into law. President Biden’s agenda and other investors are not surprised. In fact, they had already anticipated ongoing conversations amongst the president and Congressional leaders in Washington, D.C.
Moving beyond inflation issues
Regardless of political preferences, nobody wants to see inflation rise to the level where acquiring capital becomes more expensive. Higher inflation would cause significant decreasing returns and dwindling profits for VC investors. An increase in inflation would cause less competitiveness in many sectors across America, potentially in the tech space as well.
If higher inflation does occur — no matter the challenges — VC investors would still have to be available to invest in and help grow tech-related businesses.
If tech companies expand and profit enough to go public, our economy benefits when these new public companies raise even more capital to create more job opportunities.
A slight increase in inflation is sustainable, but not to the point of overvaluing any sector of the economy. VC investors are part of the bridge that helps a start-up find its way to becoming a major public company. Overvaluing would crumble that bridge.
Image Credit: ruslan burlaka; pexels; thank you!
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