Venture capital firms' financing has been rising exponentially in the past couple of years up until 2021. Throughout 2021, start-up funding globally has risen to US$612 billion from US$294.23 billion, or a significant rise of 108% year-on-year. Venture capital firms had flooded start-up companies with more cash and liquidity than they knew what to do with, making these companies perceived as overvalued by the market. However, a majority of start-up companies’ growth in 2021 did not meet analyst expectations, as well as the fact that they are not showing any sign of becoming financially secure or profitable anytime soon. Several other macroeconomic factors include the never-ending COVID-19 pandemic, the war between Russia and Ukraine, skyrocketing oil, gas, and food prices, and an all-time high inflation since decades. Which led to last week’s plummeting stock prices across indexes around the world, especially in the tech sector where most venture capital firms invest their money in. Some well-known firms such as SoftBank and Tiger Global reported heavy losses due to this sudden burst of the tech sector bubble. This poor public market performance for growth stocks in the first quarter caused a slowdown in IPOs, thus making VC firms unable to exit their position and realize their gains. This has put investors on alert, as in the first quarter of 2022, start-up fundings were down to US$70.7 billion, 26% less compared to the previous quarter. As a result, start-ups started tightening their belts and reducing their labor costs with layoffs. This month alone, employers had to let go 5,400 workers, the highest since January 2021.
To adapt to said stagnation, corporations must innovate to thrive in today's ever-changing market, regardless of the size of the corporations. While startups have strong innovative fundamentals, large corporations' expansion becomes mired down in processes, bureaucracy, and false security. Despite the slowdown, some companies survived to maintain their businesses, for instance, General Electric (GE), which became one of the world's most diversified corporations with businesses in various sectors such as power, renewable energy, aviation, and healthcare. Large corporations, such as GE, have historically pursued innovation projects through R&D (Research and Development)—the General Electric Research Laboratory was the first industrial research facility in the United States. In addition, corporations are using M&A (Merger and Acquisition) to thrive, since, theoretically, purchasing a settled company has fewer risks than establishing a new one. However, both in-house R&D and M&A have advantages and disadvantages. As a result, a third vehicle known as corporate venture capital has begun to reemerge. Corporate Venture Capital is generally associated with huge corporations that are interested in innovations. CVCs are currently expanding in the funding market. Many CVC options are available–including venture capital, private equity, and investment banking–resulting in CIOs' difficulty choosing for their future investments. With all things considered, and given the boom period that has already passed, the ideal scenario is for venture capitalists to invest in the companies since the money must go someplace. Moreover, inflation is predicted to decline while the economy gets stronger at the end of the year. Higher interest rates make stocks less appealing compared to bonds and subsequently drive investors away from venture capital.
Despite the distressing decline in the present-day global venture condition, the market is not all entirely equivocal. For instance, in Indonesia, the government is alternately targeting the formation of new corporate venture capital firms. In light of this, BUMN has encouraged Bio Farma Group, together with Kimia Farma and Indo Farma, to develop technology and invest as a way to finance startups in the food and renewable energy (EBT) sector. To add to that, reflecting on the expansion of bank-affiliated venture capitals such as Mandiri Capital and BRI Ventures, PT Bank Negara Indonesia (BNI) officially forms its own self-governing venture capital named PT BNI Modal Ventura. The newcomer was injected with Rp500 billion initial capital as of Thursday (5/12). Following market trends, PT Bank Central Asia (BCA) has also prepared Rp400 billion to expand its venture capital, Central Capital Ventura (CCV), and will continue to invest in startups that have the potential to grow and be profitable. Lastly, East Ventures, one of the venture capital frontrunners in Indonesia has managed to get US$550 million new funding to support tech startups. Believing that Indonesia is among the fastest-growing digital economies in Southeast Asia, this Singapore-based company has bet on more than 200 startups including Tokopedia, Ruangguru, Xendit, and Sirclo. All and all, foreseeing into the not so far future, startups need to adapt and equip themselves with new technologies and business models in this ever-changing market to attract investors. In line with economic growth and recovery, VC firms are also believed to reaccelerate in spite of the downward spiral conditions.
Sources:
Bloomberg
Bisnis
Forbes
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