How Startups Can Manoeuvre the Current Funding Slowdown


According to a CB Insights report, global startup funding fell 23% in the second quarter of 2022 from the first quarter, with $108.5 billion invested in 7,651 deals. This is the biggest quarterly percentage drop in deals and the second largest plunge in funding in a decade.

However, despite the aggressive drop in deals, both funding and the number of deals remain above 2020 levels. The U.S. saw almost half of all funding at $52.9 billion, a 20% decrease from the previous quarter and the lowest quarter since 2020.

Only 85 unicorns came into being in Q2, 2022 globally, a 43% drop from Q1. The U.S. birthed the most unicorns, a total of 49, followed by Europe, which saw the rise of 16 unicorns.

In the second quarter of 2022, VC investments in Indian startups stood at $6.9 billion, down by a whopping 60% from $11 billion in Q1.

The funding slowdown has spread to early-stage startups in the U.S., with the segment suffering its biggest investment drop in over a decade. In Q2, venture capitalists invested $16 billion in early stage (Series A and B rounds) startup deals in the U.S., which marks a 22% decrease from the previous year.

Seed funding was the most robust stage in May 2022, with $3.1 billion invested in seed-stage companies. Seed-stage funding increased 11% from the previous year’s monthly average of $2.8 billion.

In recent years, venture firms competed against each other to invest early and often in a startup’s lifecycle, a sentiment that is no longer shared as investors proceed with caution toward riskier investments.

In early 2022, venture capitalists stayed optimistic about early-stage investments even as public shares plunged. A worsening macroeconomic environment and a virtual freeze in investment for growth-stage startups have changed that.

In this environment, the youngest startups have to demonstrate their clear path to revenue and profits to bag investment.

After a decade of cheap money available at low rates and high market liquidity, startup founders now looking towards a funding slowdown. Here are a few reasons why:

  • Interest rates are on the rise, increasing the cost of borrowing money.
  • Investors have a smaller appetite for risky investments as they can get guaranteed returns on secure and stable investments.
  • The stock market is falling, and public-market valuation correction affects the private markets.
  • Consumer spending is declining, which affects company earnings in the short term, ultimately amounting to a recession.

Action Steps for Startup Founders and Small Businesses

Extend your runway

Can you slow down your growth to sustain this funding slowdown season and then accelerate growth on the other side? Consider sacrificing growth in the short-term and focusing on sustainability to avoid having to raise funds in this season. This does not mean you’ve accepted failure, only that you are adapting to a rapidly changing economic environment.

Understand what investors are looking for

Investors are interested in making cash right now but not at high risks. They either want to invest in efficient, cash-rich and profitable startups or those that operate in recession-proof industries, such as safety and security products- low-cost consumables, life-saving drugs, and utilities that help consumers save on their electricity bills, for instance.

Between enterprise SaaS and e-commerce, two sectors that attract the most investor interest, VCs invested in 211 e-commerce businesses in Q2, down from 330 investments in the previous quarter, a 36% decline. Similarly, VCs participated in 30% fewer enterprise SaaS deals in the same period. Studying investor patterns can help startups prepare for funding.

Show proof of agility

Startups with a low Customer Acquisition Cost (CAC) can attract the attention of risk-averse investors. The best thing startups can do is show investors that they are agile enough to survive and gain market share in an economic downturn. Demonstrate how you can go from aggressive growth to conservative growth and preserve the vision and essence of your business to ride out the current funding crisis successfully.

The word is ‘profitability’

Over the past decade, startups enjoyed easy money and funneled it into higher revenue and market share, putting off profitability for the future. That future is now here and investors are using the word ‘profitability’ more than ever.

What can you trim that doesn’t affect profitability or customer experience in any way? Can you collaborate with other startups and barter services? Experts suggest this is the time to cut the ego aside and buckle up to run for the fundamentals- profitability.

Identify your “lipstick” product

The “lipstick effect” was coined by Leonard Lauder in 2001 when he observed that lipstick sales continue to grow in an economically beat market. The idea is that consumers find the budget for small indulgences for an emotional uplift during trying economic times, even as they eliminate purchasing expensive items. Is there a “lipstick” product that your brand can offer to stay afloat?

How About Equity Crowdfunding?

This year seems to be monumental for equity crowdfunding as much stigma sheds around only startups not good enough for VC raising this way. With the traditional fundraising climate cloudy, equity crowdfunding may get its fair share of due attention.

Any company that meets the SEC qualifying criteria can apply to raise through a crowdfunding portal. A crowdfunding portal, StartEngine, reported that it’d seen double the number of companies applying to raise capital on its portal in the first four months of 2022 compared to 2021.

Crowdfunding is a sought-after alternative to raising VC funds and is sometimes the primary choice. In terms of raw reach and exposure, nothing beats crowdfunding. It also allows you to build a community while raising money and boasts of strong funding potential.

Read our latest pieces around crowdfunding and speak to one of our crowdfunding experts today to learn if it’s the best way for you to raise in a climate of recession-

The Role of Branding in Crowdfunding Campaigns

The 6 Pillars of a Successful Equity Crowdfunding Campaign

7 Ways to Keep Your Equity Crowdfunding Campaign on Track

Common Questions About Equity Crowdfunding

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