Asian startups, which have so far raised $12.7 billion, will see the biggest drop, with funding set to plunge 31% this quarter. US-based startups are also expected to see less investment, with funding projected at $61 billion. That’s a 13% drop from the previous quarter and the lowest in any quarter since 2020. European startups will see a 16% drop in funding, the report said.
On Thursday, Silicon Valley’s famed startup accelerator Y Combinator advised founders of all its portfolio firms to plan for the worst and prepare for an economic downturn by cutting costs and extending their runways in the next 30 days.
Y Combinator in a note said that if a company is planning to raise money in the next 6-12 months, it might be doing so at the peak of the downturn.
“Remember that your chances of success are extremely low even if your company is doing well… We recommend you change your plan,” the note said.
While Indian venture capitalists (VC) are warning their founders about the funding slowdown, investors also believe sound companies will survive this winter.
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“VCs are no longer looking for a great idea. The fundamentals of the business are more important – real unit economics and growth margins,” said Amit Somani, managing partner, Prime Ventures.
“People who were largely raising money based on vanity metrics are those who will come under scanner today… I think viable business models and viable paths-to-profitability will become more prominent,” he added.
Which sectors will suffer the most?
“Fintech, digital health spaces, and retail tech are set to witness the sharpest fall — with funding in retail tech declining by 50%, the highest,” the CB Insights report said.
Globally, investors signed around 1,443 deals in the fintech segment in Q1 2022, which is likely to drop to 1,038 in Q2. To date, around 519 deals have been signed in the fintech segment in Q2, it said.
For retail, around 891 deals were signed in Q1 2022, which is likely to fall to around 556 in Q2 of 2022. The retail segment saw 663 deals in Q1, which is likely to plunge to 470 in Q2, the report added.
Fewer unicorns and IPOs
Meanwhile, there will be fewer than 100 unicorns minted in a quarter for the first time since 2020. Only 62 startups expected to become unicorns in Q2. US and Asia are set to be hit the hardest, with an expected decrease of 43% and 67% in new unicorns, respectively.
Initial public offerings are also drying up as public markets remain volatile.
According to the report, only 92 companies are expected to go public in the quarter — marking a 34% from the previous quarter and a nine-year quarterly low.
