The vast amount of time in venture capital is spent looking toward the future. However, occasionally, historical data is valuable in telling us where things may go next, and more importantly, what we can learn from the past. It’s clear the dust has settled on a busy period of fundraising activity over the last few years, with many companies building valuations to unsustainable figures. While the price of innovation may be lowered in the current period of decline, the standard certainly isn’t.
Economic cycles fluctuate between years, although cycles of innovation span decades. For these cycles of innovation to deliver outsized economic benefits, namely the growth of Space based Technologies, it’s important to understand how they can both work simultaneously - especially when one cycle is in decline.
Last week saw the release of some useful data on overall venture activity, notably the 2022 Annual European Venture Report and 2022 Q4 Venture Monitor (US) by Pitchbook. Some key points from JP Morgan’s analysis:
- Founders will need to continue to dial back cash burn where possible to extend runway. This is especially true in Series B or later, where the gap between valuations at the last raise and current market realities is the largest.
- Q4 tallied just 146 acquisitions totalling roughly $763 million, which is the lowest quarterly deal count and value we have seen in nearly a decade.
- We also saw a sharp decline in the median post-money valuation for buyouts of VC backed companies, falling from $280.0 million in 2021 to $120.0 million in 2022.
Meanwhile, investment into private SpaceTech companies has decreased by around 25% over 2022. Considering SpaceTech is a fairly new investment category, even with this decrease, the levels of investment activity are still higher than three years ago. As highlighted in Sifted’s SpaceTech Report, there is promise on the future of industries in the downstream SpaceTech markets.
Unsurprisingly, varying levels of optimism exist across the different market outlooks. Although there is one thing all parties agreed on – for companies creating technologies fulfilling industry needs, there are markets to be tapped into.
Interestingly, a common theme across venture and Space reporting was the need for secure data linking and communications. Has innovation in cybersecurity been abandoned too long?
“Across energy transmission, renewables, and clean tech, we’ve got five company-side raises underway right now, and they’re all actively negotiating term sheets or closing rounds. There are always some sectors that are either unaffected or countercyclical, and it’s about finding those. Cybersecurity, for example, continues to be robust. As one of my clients says, “Hackers don’t care about inflation.””
Joe Altendorff, Dentons Venture Technology Group
..”we expect expenditures for equipment and technology, including software, to remain resilient. Solutions to enhance efficiencies, modernize supply chains and safeguard infrastructures are increasingly viewed as nondiscretionary outlays for commercial customers. The rise in geopolitical tensions and incidences of cyberaggression over the past couple of years reinforces this view”
Ginger Chambless, JP Morgan.
Contrarian investing is often a good way to make money. If you look back over the last three-four years, the space area that’s received the least amount of investment is what we call downlink or how to get data to Earth in a cybersecure way. We believe there’s huge opportunity here”
Mark Boggett, Seraphim Space
For investors, the opportunity cost of backing innovation during this period is undoubtedly lower. For entrepreneurs, the ability to build a robust business in a negative climate is one of the best foundations for future growth. For the individuals on both sides of the table identifying the gaps, the opportunity is exciting - as Stanford economist Paul Romer once said, "a crisis is a terrible thing to waste”…
https://www.visualcapitalist.com/the-history-of-innovation-cycles/#:~:text=Long Waves%3A How Innovation Cycles Influence Growth&text=Coined by economist Joseph Schumpeter,outsized effects on the economy.