Economic marker: VC trends show US economy faltering

Wall Street in New York City is synonymous with the U.S. financial markets. — © Digital Journal

Many global economies are wobbling, and this includes the U.S. This is linked to the aftermath of COVID-19, the Ukraine situation and other global events. There are also some fundamental factors that cause structural weaknesses, such as a sowing population growth and questions over whether new technology can be translated into higher productivity growth, according to Deloitte.

One assessment of economic trends is with patterns of venture capital funding. The current trends within this area are not encouraging, suggesting, for the U.S. economy at least, that fewer risks are being taken.

After a year of seeing record venture financing, venture capital funding has decreased by 23 percent in Q2 2022, and it is predicted those numbers will dip down further by the end of Q3.  The Q2 data indicates the biggest quarterly percentage drop in deals (and the second-largest drop in funding) in a decade.

However, according to Ray Zhou, Affinity’s co-founder and co-CEO, there is some hopeful news on the horizon for those who are reliant upon stock markets.

For many economists, venture capital firms help to develop an economy through capitalizing on promoting innovation and financing the development of new products, new technologies, and processes. This view is not universal, especially those who see small businesses and anti-monopolistic practices as creating fairer markets. Nonetheless, the state of play with venture capital is an economic indicator to take note of.

Zhou explains to Digital Journal: “It is clear that the venture investing world has changed, with the public market slowdown and the closing of the IPO window directly impacting startup valuations. However, we are yet to see the volume of investments being made slowing down as much as feared but we expect that to be the case more in the second half.”

Zhou adds: “We see that volume shift in our platform that shows that venture capitalists are adding new deals to their pipeline at a 23 percent slower rate than in 2021 – pointing to a much more strict set of criteria being applied to potential investments.”

In terms of positive signs, Zhou says: “Given the amount of money available to be called down by venture capitalists is actually increasing, we do not expect that this situation will just lead to better deals for venture capitalists in the second half but rather an increased level of competition between venture capitalists for great investments–as they are all applying the same selection criteria.”

This connects with a strategy that many venture capitalists are engaging in, as Zhou points out: “The venture capital firms who are putting the effort into founders’ relationships, understanding the reality of their investment criteria and great deal management are going to be best positioned to win that competition.”