September 13, 2022

The current state of the market, explained by a VC, a lawyer and a founder

What goes up, must come down — but when will the market be up again?


5 min read

Sponsored by

Latham and Watkins
Mike Turner

2022 started like the end of 2021 — full of big funding rounds and chunky cheques. But Russia’s invasion of Ukraine and rising inflation has knocked the world of tech

Valuations have dropped and investors are exercising caution over their wallets. Dealroom data shows a total of $27.1bn invested during Q2 2022, the lowest total since Q1 2021.

We know the market has changed. But how — and when will it pick up again? We asked a VC, a lawyer and a founder what they think. 


To understand the current market, understand the old one 

Hussein Kanji, a VC at Hoxton Ventures, which invests in early-stage tech companies across Europe, says the last few years saw European tech boom — almost comparable to the valuations and round sizes seen in the US. 

We just reached a point in the market we’ve simply never seen before

“Maybe five or ten years ago, this was a very nascent market. This was a market that was establishing itself and getting closer and closer to the US norms,” Kanji tells Sifted. “We were kind of on the up and up.” 

Mike Turner, emerging companies partner at law firm Latham & Watkins, agrees, adding Europe saw growth that was unprecedented. 

“It was really quite extraordinary at the end of last year and even into Q1 this year, just how much capital was being deployed,” he says. “Companies could delay their IPO or other exit whilst they were able to raise funding rounds in the hundreds of millions of dollars, sometimes even north of a billion dollars.” 

But what comes up, must come down — and European tech sure did. “We just reached a point in the market we’ve simply never seen before,” adds Turner. “You had to have a correction at some point.” 

A tech downturn or a funding challenge? 

But this period of financial euphoria was not without a blip. Ciara Flood, cofounder of &Open, a startup that allows companies to gift at scale, says the current market reminds her of the market during the height of the coronavirus pandemic. 

Funding has become more constrained as investors wrestle with a number of challenges, such as market valuations and consumer confidence

Flood stalled her startup’s fundraise in 2020 and remained bootstrapped until the market conditions improved.    

“March through to August [2020] was actually a tougher time than people are saying,” Flood tells Sifted. “There was a period of time that feels quite similar to what we’re feeling now, which is people not really knowing what’s happening or what’s around the corner.” 

Turner agrees with the comparison to Covid. He says the current state of the market is like a pause for breath, where investors have slowed down and companies are more cautious.  

“Funding has become more constrained as investors wrestle with a number of challenges, such as market valuations and consumer confidence” he says.


Downrounds and uprounds

While we’re seeing almost as much early-stage venture capital investing as we ever have, Turner says it’s more focused and the timelines are longer. At the mid stage, there’s even more focus on diligence being done by investors, but he says deals are being done — where it’s really slowed is in later growth stages.

Because it’s tougher, most people are saying don’t test the waters right now

But, Kanji says, while it may look similar, we’re not repeating the market conditions of the dotcom bubble when money was pulled out of the system and capital actually went away. 

“Venture firms were walking away from term sheets, there was this chain reaction,” he says. “None of that stuff is happening today. Everyone has money — it’s called ‘dry powder’ in our industry — everyone has the capability of spending.” 

This is reflected in there still being uprounds. For instance, insurtech Wefox just raised at a 50% upround in this market and is a unicorn. 

“There are still rounds that are being done at reasonable sizes at reasonable valuations, even relative to the boom times that we had in the last couple of years,” says Kanji. “But on the whole it’s tougher and because it’s tougher, most people are saying don’t test the waters right now.”

When will the market pick up?

Turner is optimistic about the market picking up. He says while ecommerce, retail and anything consumer facing will have to contend with rising inflation, other sectors will stay strong. 

“The technology sector may prove to be one beneficiary of the downturn,” he says. “More and more companies are going to have to turn to innovative software and other technology-led products to remain competitive.”  

With capital sitting on the sidelines, Turner sees the possible return of confidence and activity before the end of the year, noting that some of the big tech companies have positively surprised the market in recent weeks.

Kanji, however, is a little more reserved. He says because the sentiment of investors is unsure it’s hard to know when the market will bounce back. 

“I don’t think anyone really understands what’s going on and so sentiment hasn’t really changed right now,” he says. “People aren’t going out for financing rounds, the inaction I was talking about could be prolonged for a while.” 

Advice for founders 

What can founders do to ride out the current market? Kanji says most VCs are telling companies not to go out for a fundraise, unless your startup is desperate. Therefore, the focus should be on preserving cash. 

We are seeing more diversity in the funding market

“It’s about extending your runway,” says Flood. “At &Open we’re still very much growing our team and growing the business, but we are definitely not being as aggressive as I think we would have been if this was 2021 in a different environment.” 

Turner says founders should also be aware that the landscape is changing as to where capital is coming from. 

“We are seeing more diversity in the funding market,” he says, citing the growing influence of Middle Eastern capital in the European technology market as one example.

Turner adds it’s also a very good time for American investors to come into European markets, as the dollar is very strong against the euro and the pound. 

“They’ve got a particular reason for looking at Europe right now,” he says. “Valuations are one tick lower but the dollar’s two ticks stronger.”