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Quick Takes: The Future of Funding Markets

Newsletter published on:
January 28, 2022

What is the news?

The public markets have been unkind to tech companies since the beginning of the year but we saw three VC funds announce new funds this past week

What is going on in the public markets?

The public market has not been kind to public tech companies this year: QQQ is down 12%, Shop is down 33%, Lightspeed is down 22%, thinkific is down 27% extra

Which funds were announced this week and what makes each one interesting?

But three VC funds announced new funds this past week:

  • MaRS IAF announced the Graphite fund $100m fund focused on seed and A stage companies. $77m is in the first close with $25m from Ontario and $25m from OMERS.
  • Deloitte Canada launches a $150m fund called Deloitte Ventures.
  • Builder VC announced a $250m USD fund.  They are SF based but have a partner Mark Blackwell in Canada.

*check out the full episode to see which one Alex has his eye on*

Why are VC funds still being announced if the public markets are crushing valuations?

Private market valuations are not updated until something material happens to a company (goes bankrupt, raises more funds, etc). They take time to react to the public markets. The markets have to change how they are valuing companies for a while to see the downward pressure on private companies. Further complicating things is that it will take longer for early stage valuations to be impacted by the public market as pricing pressure takes time to materialize. The first companies that will be impacted are pre-IPO companies with limited cash on hand (if the markets continue to re-price public stocks).

VC funds that have already raised have an incentive to deploy the cash. VC funds will have trouble raising new funds if public markets stay low as it will hurt returns and overweigh private market holdings of large institutional investors.

What is the implication for founders and their teams?

First thing all founders that have earlier stage companies and are struggling to hire should now be targeting employees that have been a late stage or public companies for less than two years. Those employees compensation package is a lot less attractive with their option grants underwater. Start recruiting.

For funding and valuation, it depends on the stage of the company, the last valuation you raised at and your cash on hand.

The later stage a company is, the higher the valuation was to metrics and less cash you have on hand the quicker I would be in the market looking to raise just in case cash. The earlier stage you are the less you will be impacted, you may see no impact if you are in a hot area (like climate tech) BUT you should be more picky on the investors you have in your round than ever and you still may see some valuation compression.

For potential employees, make sure you understand how much runway a company has and the valuation of the options you are getting to understand your total compensation package.

Our Growth Marketing Manager, Alexandra Reilly joined Alex Norman for this week's Quick Takes. Catch the full episode here

You can also check out past episodes on our Spotify and YouTube