Venture capital has been booming for several years. Fueled by easy monetary policy and the emergence of companies with “disruptive” business models, global venture funding grew consistently over the past decade, more than doubling in 2021 to reach an all-time high of $650 billion. Along with growing VC funding levels came an increase in so-called “mega-rounds” of $100 million or more and a proliferation of “unicorns” valued at $1 billion or higher. This flow of money has had a significant impact on FDI. Although there is no data on the share of VC-funded companies in FDI, most professionals in the field of investment attraction have likely experienced the influence of startups and scaleups in recent years.
How is VC funding changing?
Fast-growing companies with lots of cash to burn have expanded internationally at a tremendous pace, often announcing a string of new facilities in short periods of time. VC-funded companies have boosted FDI across all industries, from agtech and fintech to life sciences and new mobility. Vertical farming, plant-based meats, E-scooters, and food delivery are just a few examples of sectors where venture capital has turned startups into global players almost overnight.
For many of these companies, the party seems to have come to an abrupt end. Global VC funding in 2022 fell by 35% compared to the previous year (source: CB Insights), with a dramatic decline in the number of mega-rounds, new unicorns and company valuations. In addition to lower funding levels, the way that VCs are financing startups has also changed. Growth and scaling at all costs are no longer imperative and the focus of venture capitalist investors is increasingly on companies that have sound business models that allow them to become profitable, rather than simply to become big. Many of the same scaleups announcing hiring sprees and plans for global expansion in 2021 are now announcing significant layoffs.
How can investment promotion agencies actively respond?
The slowdown of venture capital is likely to affect the pipeline of investment promotion agencies in many parts of the world. Here are a few ways that investment promotion agencies can react to the changing environment.
- Look at your existing pipeline of projects for VC-funded companies that may no longer have the money to implement the investments they were originally planning. This may include projects that you have already counted and announced as wins. Speaking with these companies will reveal whether their original expansion plans are still viable.
- Focus on specific geographies and sectors where VC funding is still vibrant. A few countries in Africa and southeast Asia are still experiencing VC growth, while funding continues to flow to sectors such as cleantech that address critical societal needs and are not dependent on consumer spending.
- Speak to the people who know where the funding is going. Many venture capital funds are highly focused on specific sectors and technologies. Discussions with them will help you understand what trends they are seeing and how your location might position itself to attract companies from their portfolio.
- Keep an eye on startups in your own location. Layoffs by some of these companies may free up previously scarce talent that could be attractive for new investors. If your startup ecosystem is healthy and resilient, this can serve as a promotional message to other companies, including larger corporates.
The new age of VC funding
The slowdown in venture capital funding will no doubt affect what has been a great source of investment leads and projects in recent years. However, VC funding may be changing but it is not going away. VC funds still have large amounts of uninvested capital (or “dry powder”) that they need to deploy. Startups and scaleups will continue to be an important source of FDI for locations around the world. Since most newly funded companies are more likely to have a solid business model than in the past few years, the risks of attracting them to your location should be lower. Investment promotion agencies that understand the changing nature of venture capital will be well positioned to continue attracting innovative startups and scaleups to their locations.