The Science Center Capital Team has done a review of current trends in capital markets and has noticed a few key trends for early-stage ventures in the Philadelphia region and beyond. First, interest rate hikes globally have made capital more expensive to raise and decreased at a macro level the risk appetite for traditional VC and PE deals. Based on available data it is likely that recessionary pressures are expected to endure for 12-18 months and a return to capital availability of past two years is unlikely to return until 2025-2026. It is worth noting however that even with current downward pressures, the amount of capital currently available in the market, especially after the seemingly easy money of the past two years, the total available capital in the market for VC/PE investing (as of now) is still greater than in 2019.
Perhaps most important to note for early-stage startups is where capital has dried up in the markets. Seed and early-stage investing (angel investing and micro VC/seed funds) has been remarkably resilient in markets overall with the biggest decreases in available capital coming from the growth set of capital (ie. late-stage venture and private equity). Based on a June 2022 report from Crunchbase, seed funding actually increased 11% as of May 2022 ($3.1B) from May 2021 ($2.8B). So what does this then mean for startups in the space?
Startups looking to raise in this environment will need to focus on addressing not only traditional technology development issues but also other barriers to investment such as corporate structures, vesting schedules for founders, clear IP agreements and other key measures to be competitive for funding.
As capital markets continue to absorb risk in the greater economy it is highly likely that while investment interest will not decrease at an early stage, there will be much more competition among startups for investments. The implications of this will likely lead to decreased valuations by investors from what we have seen in the past two years. Further, there will be an increased focus on fundamentals for companies with special attention paid not only to innovative technology solutions, but also to key company and corporate housekeeping measures. Startups looking to raise in this environment will need to focus on addressing not only traditional technology development issues but also other barriers to investment such as corporate structures, vesting schedules for founders, clear IP agreements and other key measures to be competitive for funding.
It is also likely that for early-stage technology companies, especially those in the life sciences arena, governmental based non-dilutive funding will become even more important as a lifeline for company development.
It
is also likely that for early-stage technology companies, especially
those in the life sciences arena, governmental based non-dilutive
funding will become even more important as a lifeline for company
development. The good news is that the traditional pot of funding for
tech-based companies (SBIR/STTR) is slated to potentially double over
the next three years. In addition government programs such as SSBCI and
ARPA-H along with others promise to continue to provide de-risking
capital to firms in emerging fields. It would be recommended that firms
closely watch these funding opportunities and plan for them
strategically in their corporate and technology-based development
strategies.
For Philadelphia’s early-stage life sciences firms the market correction at a macro level does not present a scenario of a dearth of capital, but it does present an opportunity for entrepreneurs to focus on business fundamentals in a meaningful way while being creative on fundraising strategy over the next several years.
For Philadelphia’s early-stage life sciences firms, the market correction at a macro level does not present a scenario of a dearth of capital, but it does present an opportunity for entrepreneurs to focus on business fundamentals in a meaningful way while being creative on fundraising strategy over the next several years. At the Science Center, we're actively working to develop and deploy programming to serve startups in being best prepared for capital readiness in the ever changing capital markets.