Where Is Venture Capital Headed In 2022?
This article originally appeared in Forbes on March 10, 2022. You can read the original here.
By Suzanne Fletcher
My colleagues and I at Prime Movers Lab reviewed more than 3,000 investment opportunities last year and are on pace to exceed that in 2022. In the process, we deployed more than $400 million across six sectors: transportation, energy, infrastructure, manufacturing, agriculture and human augmentation. To accurately allocate capital across so many burgeoning sectors, every year, we run 25-plus squads, which are our internal teams that go deep on particular technologies and themes, such as lithium, orbital debris and cultivated seafood. The work of these squads, combined with the careful watching of public and private markets, have led me to a few predictions for where I see venture capital going the rest of this year. Here is what to watch for:
• Funds and companies hang onto cash longer. More venture funds were raised in 2021 and more startups received funding than at any other point in history. I think it is likely that companies that raised venture funding in 2021 will hang onto that capital a bit longer in the face of uncertainty in the public markets as interest rates likely increase. Venture funds are likely to do the same as investment periods and fund cycles — which had contracted to 18 months in many cases — will likely return to a three-year cadence for most firms.
• Valuations come back into check. Valuations of enterprise software-as-a-service (SaaS) and consumer app startups have been bid up consistently over the past decade. The early stage company that once would be valued at $6 million is now easily $12 million-plus; investment round sizes have gone up to compensate and get investors required ownership. Interest rate hikes are almost inevitable given inflation. This should slow economic growth and bring valuations back from their stratospheric highs. Lower valuations should entice venture investors to continue to risk allocate even as the macro environment becomes more uncertain. For that reason, I don’t expect dollars invested or deal-making will actually slow down any time soon.
• Battery manufacturing will have an exciting year. One of the most exciting sectors will be battery manufacturing. Last year was the year of electric vehicles with companies such as Rivian going public. Lithium battery production is going to have to increase dramatically to support the electric vehicle transition. The excitement over electrification will be tempered in part by increasing public scrutiny over how such materials are mined (e.g., cobalt). This will create more demand for technologies that allow for cleaner and more efficient mining.
• More mature, better-capitalized companies will go public. I expect to see fewer special-purpose acquisition companies (SPACs) in 2022. In my opinion, there is no way the massive influx of SPACs could continue after 2021, which was a record year. Lessons have been learned (or relearned depending on how many cycles you’ve been through) about taking companies public too early. I expect to see startups raise more money, including Series D (or even Series E round) and stay private longer. Crossover, late-growth-stage investors will have even better opportunities in 2022. Early-stage and early-growth-stage funds will spend more time building syndicates before taking a company public.
• Venture market becomes more decentralized. I believe that venture capital dollars will continue to go to a broader array of founders beyond Silicon Valley. There are great startups in every corner of the country, and most no longer need to make the trek to Sand Hill Road to raise money. Both entrepreneurs and investors have benefited from “Zoom-only” first meetings. Not only will more companies be founded outside Silicon Valley, but startups that started there will continue to leave for states with more favorable business climates and cost of living, such as Arizona, Texas and Florida. We have already seen this in our portfolio with an entire team of 20 picking up and moving to Phoenix.
• Bio and health startups continue to garner attention. Last year was defined by the pandemic again. I expect 2022 will be the year that Covid-19 becomes endemic, but startups will remain focused on improving human health. As my partner, Dr. Amy Kruse, recently pointed out, we truly are in the golden age of biotech. While many startups claim to be working on breakthroughs that will change the course of human history, only a few companies are actually working on technologies that could radically extend the human lifespan. They’re likely one of the few sectors that will continue to benefit from SPACs, because most biotech is capital-intensive and many companies tend to go public with little or no revenue while their treatments are in clinical trials, making them a natural fit for SPACs. Biotech and pharma funding activity exploded in 2021, increasing to a record $36.3 billion of funding as of December 1, according to Pitchbook. In addition to digital health startups, we expect to see new treatments, like psychedelics, continue to see investment interest.
• Consumer values will drive corporate change. Consumers have more power than ever, and they are making their voices heard. Transparency and accountability for corporations will continue through the year. Consumers are looking to align their personal values with the products they choose and the companies they work for. I strongly agree with Sophie Purdom and Kim Zou from Climate Tech VC who make the argument that, “Carbon removals make for cheap recruitment marketing and retention.” I expect food-tech investing to also have a banner year. Expect to see increased investment across the board but in particular, in seafood, a sector that is relatively undervalued in comparison to market size and potential.
I can’t wait to revisit these at the end of the year to see how many of them come to fruition.
Suzanne Fletcher is a General Partner at Prime Movers Lab, the world’s leading partner of breakthrough scientific startups. Follow me on LinkedIn.
Prime Movers Lab invests in breakthrough scientific startups founded by Prime Movers, the inventors who transform billions of lives. We invest in seed-stage companies reinventing energy, transportation, infrastructure, manufacturing, human augmentation and agriculture.
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