2022 has been tough for startups, but recessions offer investment opportunities
The technology sector is experiencing an unprecedented slowdown, but analysts see huge opportunities for startups that survive the recession.
Around the world, venture capital funding fell 35% in 2022 from the previous year, according to a new study by Startup Genome and the Global Entrepreneurship Network (GEN). The 2023 Global Startup Ecosystem Report (GSER 2023) also noted delays in the number of deals, exits and unicorns. But a deeper dive reveals reasons for optimism.
After a year of heavy market losses, inflation is now slowing down and economic growth appears to be holding up. The headwinds remain a challenge, but the 2023 GSER notes that recessions are good times to invest in startups.
Historical trends support the theory. Startups funded during the Great Recession had higher exit multiples relative to total money invested than those funded during economic expansions. During recession years, startups that achieved Series A funding could multiply that round’s value by 20 by the time of exit.
“Lean economic times can produce high-performing startups.
Tangible examples of successful startups born into a recession include Spotify which picked up a Series A in 2008, Twitter which did the same in 2007 and Flipkart in 2009. Similar successes emerged after the dotcom crash of 2001. When the bubble burst, pessimists sounded the death knell for the tech industry. Within a few years, their prediction turned out to be all wrong.
The wave of mass layoffs will also unleash a new wave of startups. A huge pool of top talent with technical know-how and industry expertise is now seeking new ventures.
“Given that more than half of the companies on the 2009 Fortune 500 list launched during a recession or bear market, we know that lean economic times can spawn high-performing startups,” said Jonathan Ortmans, founder and president of GENE.
“Despite recent pullbacks in investment, this report predicts where we could see the world’s most disruptive and solution-oriented companies emerge in the coming years – providing unparalleled insights that policymakers and community leaders need to build resilient startup ecosystems.”
In addition, the report notes that high interest rates can actually benefit startups. They concentrate capital and talent in value-creating companies, removing the less competitive ones. Although fewer start-ups were financed in 2022, they did receive larger amounts. According to the GSER, the average deal size grew by 2%.
These investments are increasingly focusing on artificial intelligence. AI and big data was the subsector with the highest number of VC deals in 2022, accounting for 28% of the global share.
European outlook
The report highlights numerous positives for European startups. Despite macroeconomic concerns and geopolitical tensions, 2022 was the second-biggest year after 2021 for European VC activity, with deals and volume surpassing pre-2021 figures.
The continent has also conquered more unicorn land. Although there has been a global slowdown in the number of startups worth more than $1 billion, the share of unicorns in Europe has increased from 14% to 20% by 2022.
Of the seven ecosystems that spawned their first tech unicorn in 2022, three were in Europe: Sofia-based Payhawk, Rimac in Zagreb, and Rohlik Group in Prague.
Europe is also the most represented region in the GSER’s “Emerging Ecosystems”, which consists of startup communities in earlier stages of growth. The continent has increased its share from 37% to 41% since last year and contains the number one ecosystem: Copenhagen.
Europe’s performance was even stronger in the Strong Startup category, which includes the 25 emerging ecosystems where early stage financing activities are the most robust. More than half of the class is European, including the top four: Istanbul, Barcelona, Estonia and Madrid.
Of the leading ecosystems, London remains number one in Europe and joint second globally.
The British capital has the most companies worth more than $1 billion. The city’s 83 exits with more than $50 million include Wise, with a valuation of $12.2 billion, and Deliveroo with $10.5 billion. Revolut, one of Europe’s largest fintech unicorns, is valued at $33 billion.
Berlin is in second place. The German capital minted five new unicorns in 2022, raising its total from 14 to 19. Exits of more than $50 million are up 40% since the 2022 GSER, with AUTO1-Group raking in the highest value at an IPO of $9.2 billion.
The third spot was held by Amsterdam, thanks to an increase in exits of more than $50 million, the number of early-stage deals and unicorns. Banking platform Backbase is the most recent addition, worth 2.7 billion.
“This vital mission cannot be put on hold.
Another ecosystem that deserves special attention is Zurich. The city rose 10 places to 36th in the world, marking the biggest year-on-year improvement in Europe. Exits over $50 million have grown by as much as 300%, with Healthtech Pharvaris exiting at a $636 million valuation. The number of unicorns, meanwhile, has risen from two to six, including Blockchain company Dfinity, which is valued at $9.5 billion.
Zurich provides further evidence that startups can still thrive during a recession. JF Gauthier, founder and CEO of Startup Genome, expects more success stories to follow.
“Despite the current economic challenges, we believe that entrepreneurs, policy makers and community leaders everywhere, equipped with the right knowledge, can seize opportunities to come together and demonstrate how innovative technologies can not only continue to drive growth and job creation, but at the same time help save the planet and ensure a better future for all,” he said. “This vital mission cannot be postponed while we wait for tough economic times.”
