Q1 2022 saw the VC space finally come back down to earth
We will go through where we saw growth and contraction, the drivers and drawbacks, and everything in between after the record setting pace set in 2021.
Welcome to our quarterly benchmark, where we analyze all the notable VC activity over the past 3 months and stack it up against what we saw in the previous quarters and years. We scan across the US, Europe, and LatAm to bring you the best insights, be it you are an investor, founder, or just fascinated by the startup investing space. Let’s dive right in.
Q1 in a nutshell
Q1 2022 was not a continuation of the same
As total volume and deal count lagged Q4. One could attribute a number of factors to this outcome - some of which being the war in Ukraine, rising interest rates, and general market fluctuations. Markets move in cycles and Q4 set a breakneck pace that was difficult to follow up. However in context with the previous year, Q1 2022 still posted positive results - a 27.3% increase YoY from Q1 2021.
Some things did remain the same - massive funds deployed capital at record speeds, new unicorns were minted, the Web3/blockchain space set a funding record, and the next generation of companies raised capital to shape the future.
Pullback across the board
Q1 2022 venture capital funding lagged behind Q4
Q1 2022 saw $103.8B deployed into private startups, an 18% decline from the staggering $127B of last year. This volume was allocated across 5,995 deals, producing an average deal size of $17.3M (down from an average of $19.7M/deal in Q4, a 12.2% decline QoQ). Clearly a couple trends are developing: due to a variety of factors VCs are pulling back from the market in a significant way and deploying less capital on a per deal basis, all else equal. From conversations with other VCs, We have noticed a strong trend among VCs asking for lower valuations, citing less activity, less competition in comparison to prior quarters, and global headwinds moving forward.
VC perspective
From TheVentureCity
Founders cannot control the environment in which they raise capital. Markets move in cycles and venture capital is not immune to that fact. In most of 2021 founders raised enormous sums of capital at extended valuations, rightfully taking advantage of the environment.
What never changes is product market fit, traction, receptivity with customers, product novelty, strong teams, speed to execution, and everything else that has nothing to do with fundraising multiples. Strong VCs are able to differentiate noise from results and identify promising opportunities no matter the environment.
Even in a more challenging fundraising environment, like the one we are seeing now, never apply a discount to what you are building. Strong VCs build conviction based on teams, products, and market receptivity to your solution, and will price rounds in accordance with those factors.
Later stage deals led the way
Massive late stage private rounds are still the new norm
Despite the pullback in overall funding, not much could stop the barrage of late stage deals dominating overall volume. Deals >$25M totaled $83.5B, which comprised over 80% of total funding volume. This eye-popping figure was spread across 883 deals, amounting to an average deal size of $94.5M. Clearly the new norm of large, mega deals executed at a fervent pace continues to be par for the course. It's worth mentioning the most activity, in terms of deal count, was for rounds in the $1-5M range, showing the highest activity in the Seed/Series A stages.
Europe was the only bright spot
US and LatAm see declines in funding while Europe enjoys modest growth
Due mostly to the US VC space falling dramatically QoQ in funding volume, the entire VC market experienced a strong pullback. However, Europe experienced modest growth during the period, marked by notable unicorns Blockchain.com, Lunar, and Dune Analytics. Even more shocking was Europe’s growth despite the war waged by Russia against Ukraine. We will get into the numbers below on how each geography fared in Q1 2022.
Let’s Look At The Numbers….
USA VC Landscape in Q1 ‘22
US falters, barely clears $70B
US VC funding in Q1 amounted to $72.5B, a 25% decline QoQ. This volume was spread across 3,727 deals, only a 2% decrease QoQ. Despite these figures sounding impressive at face value, in context with US funding numbers it's 2 steps back, 0 steps forward. Q1 2022 fell short of Q2 2021 ($77.5B) and Q3 2021 ($79.6B) as well, and represented 20.8% growth YoY. This noticeable drop in US deal activity brought down the industry as a whole, as the US market still represents 70% of all total VC funding.
Europe VC landscape in Q1 ‘22
Europe the only bright spot amongst general market slowdown
European startups received $28.2B in funding in Q1, a 7.6% lift from Q4 2021’s production of $26.2B and a 33.6% increase YoY. To put this in perspective, Q1 2022 was Europe’s second largest quarter by volume ever, only eclipsed by Q2 2021 ($32.9B). What’s even more impressive is that Europe saw this growth despite massive global macro headwinds across just 2,084 total deals, a whopping 15% less deals QoQ. This means the trend being set in the US is reaching the investors across the pond - where startups are staying private later and generating larger deal sizes from later stage investors ($13.5M average deal size in Q1 2022).
LatAm VC landscape in Q1 ‘22
LatAm funding continues to slide from a Q3 2021 all-time high
$3B was poured into Latin American startups in Q1 2022 across 184 startups. Both of these figures are contractions from Q4 2021, which saw $4.3B (16% decline QoQ) invested into 200 startups (-8% QoQ). However, this represents significant growth YoY in terms of funding - Q1 2022 produced an 114% increase in funding and 12% decrease in deal count compared to 1 year ago. Since the LatAm startup scene is still in its early innings, often massive jumps in funding are as a result of a few huge rounds that can skew the data; we saw much of this in Q3 and Q4 2021. Outside of FTX’s (based in Bahamas) $400M equity round, Lido raised the second largest round at $70M. Despite less activity this quarter, expect to see continued interest in LatAm’s startup ecosystem due to strong applications of fintech and Web3. TheVentureCity is particularly interested in these verticals in the LatAm region.
TMT (technology, media, and telecom), Fintech, and AI (artificial intelligence) & ML (machine learning) are most popular sectors for investors
No surprises
Investors are flocking to the same verticals
Of the $103B invested by VC funds in Q1, $69.9B of it (67.3%) went to the top 3 leading industries, the same ones that led in Q4 2021. TMT led the way with $31.7B deal volume, followed by fintech ($22.8B), and AI & ML ($15.4B). The same industries leading the way QoQ shows how popular these sectors are compared to the rest of the market. As our GP and Founder, Laura González-Estéfani, likes to say about fintech in particular: anything that facilitates payments or makes financial transactions more seamless, we like.
Focusing on Fintech
Our Interest in Fintech
Financial services is one of, if not the most, important development indicator for emerging economies. Basic and simple financial services guarantee access to economies, and access guarantees opportunities. We love the fintech space as we have many fintech investments in the US, Europe, and LatAm, and look forward to making more. Within the broader vertical, we particularly look forward to watching and investing in Defi & embedded finance sub-verticals. We will touch on trends in fintech later on in this report.
It’s worth noting the 7th largest sector by investment volume, the first time it’s cracked our top-7 chart: cryptocurrency/blockchain. We are excited and closely tracking this movement, as we expect this sector to continue to receive increasing levels of funding in the coming quarters and years.
VC perspective
The Declaration of Independence famously states that “all men and women are created equal”. However, it made no such statement in relation to startup verticals.
Unfortunately, investors have a bias towards some industries over others, sometimes unfairly, due to the success stories that have emerged in certain spaces and how they are perceived in terms of scalability and profitability.
We believe the best investors lead and venture into unsexy verticals, as there often lies the greatest opportunities.
We encourage founders to take the path less traveled - venturing (pun intended) out into less crowded markets with the opportunity for more disruption. Despite potentially longer funding periods as investors may have to get comfortable with more unpredictable markets and industries, here often lie the greatest opportunities.
Once founders prove product-market fit and traction, investors will jump on the bandwagon to avoid missing out on investing in founders solving massive problems.
Industry Spotlight
Web3 and Blockchain
Despite the entire VC industry taking a hit overall...
Web3 could not be stopped as it grew in funding volume to over $8.5B, a 13% increase QoQ. Capital allocation was spread over 400 deals, equating to an average deal size of $21.4M.
Larger deals are the new norm
Web3 deals are moving into later stage
Not only is more capital flooding into the space, but across less deals than Q4 2021 - indicating a couple of trends.
1) Valuations are being pushed higher due to continued interest in the space.
2) Web3 deals are moving into later stages (average deal size for Q1 was $21.4M) as more success stories emerge in the sector.
Founder perspective:
Investor appetite for Web3 is not going away anytime soon. Droves of new investors enter the space every quarter looking for the next disruptors. For us, Web3 is an important vertical (however far from the only one) we are focusing on for 2022. For example one of our new investments, Boba Network, recently announced its Series A financing.
Web3 is an important trend to capitalize on if it's applicable to the problem you are solving. Web3 can unlock tremendous opportunity in the forms of scalability and new revenue streams.
However, building in Web3 for the sake of doing so is, in our view, ill-advised. At the core of any business should be unlocking value for a problem that desperately needs a solution. Not all problems (at least for now) are best solved using decentralized technology.
VC perspective:
If you’re as big a fan of Ted Lasso as we are, you know the mantra the fledgling team has plastered in its locker room reads: “Believe”. If that TV show was instead about an emerging VC fund investing solely in Web3, that mantra would best be changed to “Buyer Beware”.
Like all massive trends before it, Web3 is not immune to overpromises, speculative bets, and in this trend’s case, rug pulls. Investors, many of which have not been in the space for long, must sort out fact from fiction and fixtures from fads. There is no secret sauce as the space is constantly changing, however…
Taking a long-term investing approach can help settle any fears of FOMO (fear of missing out). We see many projects where initial user growth or DAO participation is unsubstantiated by customer willingness to pay. Venture investments, in the end, must always unlock massive, novel value. If there is not a path to sustainable traction, the investment is likely not worth the risk.
Doing your homework is crucial in this space - new applications of decentralized networks are emerging by the dozens every day. Many resources exist to best evaluate opportunities - a couple we like are using relevant metrics for Web3 companies and GTM methods for different types of projects.
Key Global Drivers
War in Ukraine
TheVentureCity stands with those adversely affected
Many notable global events made a significant impact on the startup space, and none were greater in magnitude than Russia’s war waged against Ukraine. We condemn any form of war or invasion and we stand with the people of Ukraine and all those negatively impacted by this war, especially the founders, teammates, and members of our community who are impacted directly by this situation. We hear you and support you.
The effects of war
The war in Ukraine has far-reaching consequences
Wars have far-reaching effects that at first glance seem unrelated to the conflict, but at further examination, connect through long chains of interconnected trade and relationships. For a lighthearted comparison, if you’ve ever read the children’s book If You Give a Mouse a Cookie, then you can grasp how an interconnected economy can be shocked if a couple nodes are disrupted. Startups and VC firms are part of this web, and much of the drop in funding for Q1 can be attributed to the war waged against Ukraine.
War and Oil
How Russia’s position in the oil market casts far reaching effects
Russia is a massive exporter of crude oil; daily production is over 10 million barrels/day, about 10% of the world’s crude production. Oil is the energy lynchpin that holds the world economy together. All forms of trade, many aspects of manufacturing, and transportation are just a few major industries that count oil as critical to operating efficiently.
Without a stable and dependable supply of oil, world economies fall out of balance and prices can drastically change overnight, as easily demonstrated by the fluctuation in gasoline prices over the past few months.
The impact on startups
Startups stand to suffer from this war
Unless a startup is building in a few select sectors which benefit from times of war (ex: defense technology), the war in Ukraine spells more challenges ahead for startups. From an operational perspective, this war has significantly impacted supply chains: supply of many raw materials and consumer products cannot match demand and global transport is out of balance. Startups that depend on an interconnected value chain of suppliers and intermediaries are greatly hampered by the war Russia is waging.
Trouble with Fundraising
From a fundraising perspective: startups may struggle receiving funding, especially in areas directly impacted by the war, due to investors wanting to protect themselves from macro headwinds. Even if startups are insulated from war-related effects, investors may deploy capital at slower rates to protect against rising downside risk. This also relates to VCs’ ability to fundraise from LPs; it’s possible we may see less fundraising activity if LPs decide to allocate capital to the VC asset class during more predictable economic conditions.
Inflation is rising
How the rise of inflation affects VC
As of March 16, 2022, The Federal Reserve has made effective a 25 bps rate hike. The Fed has stated it intends to initiate hikes at each of the next 6 meetings to achieve a target funds rate of 1.9%. This strategy is likely designed to counter the massive inflation increase we are seeing in the US, up to 8.5%. However, this will likely affect the VC industry in major ways.
From the capital supply perspective, funding levels from LPs will likely decline as strategic investors move into income-generating securities as a flight to safety, now that they return higher yields. From the demand perspective, startups will likely demand VC in greater volume due to debt becoming a more expensive capital source.
Global Drivers Summary
Many headwinds are afoot in the VC industry. There are many factors supporting further growth and expansion, but we will be closely monitoring potential headwinds and appropriate measures to counter those upcoming challenges.
Spotlight: Florida
Mixed results across Florida
Overall regression to normalcy, but a few notable highlights in Florida
Florida’s funding activity dropped to $1.6B across 131 deals in Q1 from a massive performance in Q4 - $2.2B (43% drop QoQ). At face value this seems like an alarming decline, but this was largely due to a few outlier deals in Q4 and generally unsustainable growth in 2021. To put this in perspective, YoY growth still stands at 18.5% and growth since Q3 was 16%. Furthermore, Q1 saw 2 unicorns minted and 3 companies valued above $300M, whereas Q4 enjoyed 3 unicorns and 6 companies valued above $300M, with the two largest companies from the quarter (MonPay and Magic Leap) accounting for $1B+ of funding alone.
Miami-based companies
Exciting companies emerging from Miami
In Q1 Miami produced exciting, promising companies we are watching closely. Healthcare.com, which provides health insurance comparison services, raised $212M at a $1B+ valuation from Oaktree, AXIS Capital, and Hildred Capital Management, among others. When speaking about Miami VC activity, it's imperative to mention all the exciting things happening in Web3 - Metaversal, a developer of an investment platform to provide funding to NFTs in the metaverse, raised a massive $50M Series A at a $150M valuation from Dapper Labs, Digital Currency Group, Coinfund, and 15 others. It’s safe to say Miami is still a city to watch for exciting startup activity, particularly in the Web3 space.
Spotlight: Madrid
Another great quarter for Spain
Spain and Madrid see more success stories
Spain continues to prove the mantra: “talent has no zip code”. Spain saw strong funding in Q1 - $977M across 105 deals, amounting to an average of $9.3M/deal. Spain is producing massive companies, this quarter many of which hailed from Barcelona (Paack - $255M Series D, Typeform - $135M Series C at $935M valuation, and TravelPerk - $115 Series D at $1.3B valuation).
Notable companies from the region
Major moves in Madrid
Madrid produced impressive companies in Q1, notably Clikalia and Boopos. Clikalia, developer of a real estate sales platform designed to simplify the home purchase and sale process, raised an impressive $85M Series D from notable investors like Fifth Wall and Softbank Investment Advisers. Boopos, which provides revenue-based financing to high growth businesses, raised a $30M Series A from FJ Labs and Plug and Play (Boopos is a TheVentureCity portfolio company)!
Deal appetite in Madrid
TheVentureCity betting big on Madrid
We continue to believe (and put our money where our mouth is) that Madrid, and Spain overall, will continue to become major tech hubs in the coming years. External validation of this trend comes in the form of tech investment - companies like Meta, Oracle, Palantir, Amazon, and Tencent are all making significant investments and hiring decisions in Madrid. A testament to our conviction in Madrid-based companies comes in the form of our positions in Cabify, Spotahome, Fuell, Dixper, Plexigrid, and many other Madrid-based startups. We have a large presence in Madrid, as it is our 2nd home in addition to Miami.
Spotlight: Brazil
Brazil’s performance in Q1
Brazil cooled off coming off a monster Q4
Brazil posted strong results in Q1, seeing $1.5B poured into 102 companies. However, this paled in comparison to Q4, which posted a record-breaking $2.6B invested across 102 deals. Although this was a massive drop QoQ, Brazil is in a growth period where 1-2 massive deals can massively sway the performance of the region over a quarter. We remain bullish on the region and are proud of our presence in Brazil - we have an office and team members located there, solely devoted to investing in LatAm. We have committed significant capital to Brazilian startups including RecargaPay, Digital Innovation One (DIO), and Festalab, among others.
São Paulo at the center
São Paulo stays firm in the startup scene
When talking about Brazil’s startup scene, it’s impossible to not mention São Paulo. To put it in context, Brazil saw 102 total deals in Q1 2022: 63 of those are based in São Paulo. Of the top 20 companies by deal size, 16 are based in São Paulo, and of the top 5 deals by size, 4 of them are based in São Paulo. It’s not outlandish to observe what’s happening in São Paulo in terms of startup activity and concentration and draw comparisons to how San Francisco propelled US VC activity into the limelight in the 1980s and 90s.
São Paulo success stories
Major companies hailing from São Paulo
São Paulo saw massive funding rounds in Q1. Companies to watch out of São Paulo include (all fintech): Neon raised $300M at $1B valuation, Creditas raised $260M at $4.8B valuation, and VELVET raised $200M (valuation undisclosed). We, and the entire global VC community, will continue to closely monitor Brazil’s startup activity, and more specifically São Paulo’s.
Founder perspective:
Despite this quarter’s pullback, that should not discourage founders building in Brazil and all of LatAm. There is tremendous appetite for companies building novel solutions to solve key business challenges in this region. A few trends have emerged that make for good ingredients for raising venture capital:
Building in fintech: In TheVentureCity’s Q4 Benchmark we touched on this item - fintech is front and center in Brazil and LatAm. Of the $1.5B raised this quarter in Brazil, $844M went towards fintech startups - 55.5%! Fintech is pushing the Brazilian startup ecosystem forward due to its pervasive applications, strong scalability metrics, and the market opportunity given the lack of infrastructure provided from traditional players in the region - 10% and 11% of the population are unbanked or underbanked, respectively.
Combine that driver with the fact that there is a void for payment and transaction solutions for B2B businesses and one comfortably arrives at the conclusion there are many use cases and potential fintech opportunities ripe for building in Brazil.
Building in Web3: As mentioned earlier in this report, Web3 makes most sense where tangible long-term value is created and disruption is best realized through decentralized solutions. There are few geographies more prepared to capitalize on the benefits of Web3 than Latin America/Brazil. As we stated in our Q4 Benchmark report, mobile phone and internet adoption in the region makes it easier to adopt decentralized solutions. Equally as important is the void of Web2 solutions that have yet to proliferate the region, leaving a gap for innovation.
The benefit of Web3 is it scales incredibly quickly, and despite friction in gaining adoption beyond initial mavens and early adopters, requires less intermediaries to complete a full value chain. For these reasons, TheVentureCity believes the founders that identify opportunities that are best solved by decentralized solutions in Brazil have a high probability of success.
Spotlight: Women in VC
Investment for female founders
Female founders disproportionately affected by slump in US funding
Female-only led startups in the US raised $1.5B in Q1 2022. This represents a substantial drop compared to the $2.2B raised in Q4 2021. Despite this disparity looking more favorable in context, considering the entire asset class declined QoQ, female founders received disproportionately less funding (34% plummet compared to 25% drop across all US VC funding). Interestingly enough, the percentage of female-only founded startups of total deals QoQ increased (up from 6.6% to 6.9%). However, volume proportion decreased (down from 2.2% to 2.1%). Clearly, more work needs to be done to facilitate VC funding inclusion for women, and the pullback in Q1 only further exemplified this.
Investing in female founders
When others zig, TheVentureCity zags
At TheVentureCity it pains us to see the lack of representation women receive in the venture world. However, we can’t help but smile when such a massive opportunity is presented to us. We view it as a competitive advantage that we take a no-bias, blind view when it comes to gender in the C-suite, be it at TheVentureCity or with our portfolio companies. We are proud to back female founders who are pushing the limits of what is achievable and breaking down barriers.
Some of the female founders on our portfolio:
Female founder spotlight
Female founders on the rise
Well known founders like Sara Blakely from Spanx and Whitney Wolfe Herd from Bumble are only a couple of the notable female founder stories that deserve recognition in the startup ecosystem. For this quarter’s benchmark we want to highlight a remarkable female founder from our portfolio: Florida’s own Jaclyn Baumgarten from Boatsetter!
Boatsetter is making boat sharing possible
Boatsetter is the premier marketplace for renters, owners, and captains to rent boats. Similar to what AirBnB did for vacationing, Boatsetter is doing for boating. Boatsetter allows renters to search a privately owned, worldwise fleet, contact boat owners and captains, and reserve boats. Boatsetter has thus far raised $27M in total from investors like Valor Equity Partners and WestCap and has been named to Fast Company’s best workplaces for innovators and Andreessen Horowitz’s top 100 marketplaces. Jaclyn herself has been named to Inc.com’s top 100 female founders list.
As a company founded by 2 women in Florida, we are proud to celebrate Jaclyn for all of her success and ingenuity in building a trailblazing company!
Diving deeper into the stages tells us what’s happening at ground level...
Seed Funding
Smaller is getting bigger
Seed funding (pre-Series A) was the only bright spot of investment stages in Q1, raking in $6.1B in funding across 1,561 deals. This represents 10.9% growth QoQ and 35.6% YoY. Average deal size at the seed stages came out to $3.9M/deal. As more investors enter the VC space and incumbents expand their vehicles and products, many investors are moving further downstream to invest in companies earlier in order to generate strong returns. To add data for context: 3,908 investors in Q1 made an investment at the seed stage; that figure was 2,943 2 years ago and 1,827 5 years ago. It’s clear to see in a short time period the explosion of interest and appetite for seed deals by an ever growing base of investors.
How the seed stage is changing
The rise of the micro VC
There are contrasting trends happening in the seed space: mega funds moving downstream, and at the opposite side of the continuum, micro VCs (funds <$50M AUM) popping up to support early startups with small checks. As massive name-brand funds move further downstream (Andreessen Horwitz, Greylock, and others have raised massive funds for the sole purpose of investing at the seed stage), micro VCs are sprouting to offer a different value proposition.
Micro VC value
Micro VCs bring a different value proposition, and the returns show it
In 2021, 339 Micro VCs raised $5B in assets. Even though this represents just 4% of the total assets raised by VCs during 2021, the trend is notable for startups at the seed stage: VCs are required to provide more than just capital.
Micro VCs depend upon proximity to founders and network effects to win allocations. Micro VCs invested in 3,755 deals in 2021, and were able to return $4.7B in distributions when calling only $3.3B during the same period. Clearly there is appetite for this type of investor, to be discussed below from the founder perspective.
Micro VC: Founder perspective…
It’s no secret most founders desire to have one of the few, elite, Tier 1 VC names on their cap table. However, this allocation likely only represents a portion of the seed round. Founders as of late are opting to round out their fundraising with micro VC allocations.
In small seed rounds, micro VCs are often not capital constrained and can write checks $100k-250k. This amount represents a significant commitment to the founder, and often makes for a cleaner cap table compared to receiving several small angel checks.
Check sizes do not correlate to impact. Micro VCs write smaller checks, but due to their prior work history they have expansive networks that span many startup and VC ecosystems. Founders who hope to build a robust array of networks can draw upon micro VCs to build that out, without allocating a massive portion of equity to achieve this goal.
Micro VCs are popping up outside core financial hubs (SF, NYC, Miami, Boston, etc.). Startups who are building outside of core hubs may see the benefit of working with a local investor who can more easily devote time and resources to helping them grow and scale.
Early-Stage Funding
After massive Q4, early-stage retreats in Q1
Early-stage deals (Series A & B) went on a tear in Q4 and 2021 as a whole as valuations continued to expand across the industry. Investors established a new standard of what’s possible in terms of capital deployed and the rate it could be invested. Q1 saw early-stage dealmaking return to some state of normalcy - $30.1B invested across 1,941 deals, with average deal size for the quarter being $15.5M/deal. Despite the 24.6% QoQ decline, Q1 showed how far the early stage space has come: 64.5% growth in volume YoY, with average deal sizes jumping from $7.9M to $15.5M (97% growth!)
More of the same
Evaluating investors by activity
Even though the metrics changed QoQ in terms of activity, the names did not as much. Last quarter we highlighted that mega funds are moving downstream to the Series A & B stages and using their robust capital reserves and networks to deploy capital at impressive clips. Last quarter the most active investors at early stage were Tiger Global, Andreessen Horowtiz, and Alumni Ventures in that order; this quarter those funds ranked 5, 1, and 8, respectively. This quarter more name brand funds saw high levels of activity: a16z topped the list with 29 deals, followed by Dorm Room Fund with 24, and Lightspeed Ventures with 22. Other notable names in the top 10 by activity were Insight, Sequoia, and Coinbase Ventures.
Founder perspective:
Raising a Series A or B can be daunting, as it is much more metric-driven compared to seed stage and teams are expected to hit their stride in terms of sales motion and operational efficiency. Startups at these stages are expected to have achieved product-market fit, and ideally capital should be added to light the fuse for the rocket ship to take off. Outside of these general guidelines, raising an early stage round can feel like searching for your glasses that fell off your nose with the lights off. For this reason, here are some outside resources that may be helpful for raising at this stage:
Pillar VC put out a tremendous top-to-bottom guide of all the do’s and don’t of raising at the Series A stage. They include tips on everything, including: networking with investors before you even kick off your raise, drafting a pitch deck, identifying core KPIs, and navigating the fundraising process.
Y Combinator put together a plethora of resources under a straightforward, process-oriented guide. This guide breaks down fundraising to: tactics, preparation, investment materials, process, and closing.
Late-Stage Funding
Slowdown from a record breaking quarter
After unprecedented deal-making levels in Q4 2021 (and Q3 and Q2 for that matter), Q1 2022 saw late stage investors retreat to conserve dry powder. This took form in $51.3B deployed across 1,435 deals to reach an average deal size of $35.7M, -22.6%, 4.6%, and -26% performance QoQ, respectively.
Names to watch
Today’s largest deals may be tomorrow’s IPOs
This quarter we want to bring you notable, massive late-stage deals that could be made available to the public markets in the near future. We want to bring you these startups now so you have the inside scoop:
Checkout.com: Developer and operator of an online payments platform to track and secure digital payments. Checkout.com utilizes an end-to-end payment platform that eliminates intermediaries, accepts multiple credit and debit cards, connects retailers with shopper's bank accounts, and provides data-rich insights to enable businesses to realize secure mobile and online purchasing. Checkout.com raised a $1B Series D round in January 2022 from Endeavor Catalyst, Coatue Management, and Dragoneer Investment Group at a post-money valuation of $40B.
Flexport: Flexport is a freight forwarding platform designed to provide visibility and control over an entire supply chain. The company's platform arranges goods to be transported, and subsequently tracks the inventory in real-time for orders carried by ocean, air, and road. Flexport raised a $935M Series E round in January 2022 at a $8B valuation led by MSD Private Capital and Andreessen Horwitz.
Bolt: Bolt has created an on-demand transportation platform to streamline day-to-day transportation and commute. Bolt allows users to browse and book different vehicles for ride-hailing, micro-mobility, and food delivery choices. Bolt raised a $710M Series F round in January 2022 at a $8.4B valuation led by Sequoia and Fidelity.
VC perspective…
Startups are staying private for longer and raising massive late-stage rounds to support growth past Series C and D. For early-stage VCs, it’s imperative to establish strong relationships with later-stage VCs to ensure the long-term success of your portfolio companies.
Likewise, later stage VCs can greatly benefit from creating a robust network of early stage VCs that invest across different themes and theses. This will ensure later stage VCs have a strong pipeline of promising companies before they ever start raising later stage capital.
Fintech Coming Into Focus
Key verticals have emerged within fintech that help us organize the space
In last quarter’s VC Benchmark, we took a deep dive into Web3 and how founders are building within the space. For this quarter, we are exploring a different vertical: fintech. Fintech has been revolutionizing our world for years now, but there is still so much opportunity left to capitalize upon. Below we will explore the key sub-verticals and drivers founders and VCs should know before building and investing in the space.
Alternative lending
Overview
Alternative lending consists primarily of non-bank companies that provide consumer loans, business loans, and underwriting services. Alternative lending disrupters differentiate themselves from legacy providers by utilizing AI & ML, data mining, predictive modeling, and alternative data to create superior credit risk models, more quickly, at a fraction of the cost.
Industry Drivers
Long-term, low-interest environments have led to high capital availability, driving institutional investor demand for alternative, higher-yield asset classes.
Startups in this space target a large, untapped base of borrowers without taking on excess capital risk due to banks’ unwillingness to lend to various consumers and SMEs.
The alternative lending space is less regulated for non-bank lenders compared to licensed banks.
Key VC-backed players from 2021 deals
Better - real estate lending, raised $750M, investors N/A
LendInvest - real estate lending, raised $681M, investors N/A
MarketFinance - commercial lending, raised $413M, investors N/A
SoFi - retail and marketplace lending, raised $370M, investors N/A
Mynt - microlending, raised $300M, investors N/A
Capital markets
Overview
Startups building in this space target a range of offerings in both the primary and secondary capital markets. We break the capital markets segment into four categories:
Alternative capital: Companies that enable the access, issuance, and management of capital and credit from nontraditional sources. This can include capitalization table management software, crowdfunding platforms, and SaaS securitization.
Infrastructure: Companies using blockchain, APIs, and other integration technologies to streamline the flow of funds within capital markets.
Market data & analytics: Applications that allow capital market participants to access and understand trade-level data. This can span asset classes including equities, fixed-income, derivatives, commodities, and currencies.
Trading: Platforms and exchanges that facilitate the transactions of various assets, including securities, commodities, and currencies.
Industry Drivers
Capital market institutions have seen declining revenues due to fee compression and stagnant volumes.
New entrants in the space offer competing products and services that further compress revenues for incumbents.
The alternative lending space is less regulated for non-bank lenders compared to licensed banks.
Key VC-backed players from 2021 deals
Carta - alternative capital, raised $500M from Silver Lake
AlphaSense - market data & analytics, raised $180M from Viking Global Investors
Republic - alternative capital, raised $150M from Valor Equity Partners
Capchase - alternative capital, raised $125M from QED Investors
Digital Asset - infrastructure, raised $120M, investors N/A
Consumer finance
Overview
Startups in the consumer finance space provide specialized financial services that can be tailored to the needs of individual consumers. This differs from the traditional approach of incumbent retail banks, which generally provide one-size-fits-all products. Today’s consumers are more discerning when it comes to choosing financial products, and they value the ability to easily compare things such as savings account interest rates, credit card offers, and mortgage rates.
Digital banking: Retail and SMB banking services delivered online or via a mobile app—also known as neobanks or challenger banks.
Credit & BNPL: Includes revolving credit products, point-of-sale lending services, and BNPL.
Personal financial management (PFM): Helps consumers budget, understand spending, reduce debt, and find suitable financial products.
Wallets & super apps: Mobile applications that aggregate financial services and include marketplaces for services and offerings.
Loyalty & rewards: Startups that help merchants with customer retention and marketing while providing incentives to customers for shopping at merchant partners.
Industry Drivers
The continued migration of personal financial services to online and mobile are changing how consumers spend, borrow, and save money.
Relative to previous generations, younger generations are less likely to select banks based on physical locations, allowing digital-only banks to gain an advantage: meeting prospective clients where they are, online.
Younger consumers with school loans or credit card debt are more likely to use financial services that address their specific needs as borrowers.
Key VC-backed players from 2021 deals
Gojek - Wallets & super apps, raised $1.3B from the Abu Dhabi Investment Authority
Klarna - Credit & BNPL, raised $1.29B, investors N/A
NuBank - digital banking, raised $1.15B from Berkshire Hathaway and others (went public later in the year)
Chime - digital banking, raised $1.1B from Sequoia
Revolut - digital banking, raised $836M from Softbank and Tiger Global
Digital assets
Overview
Companies in the digital assets space provide access, buying, selling, exchanging, storing, and transferring of cryptocurrencies and tokens through exchanges, wallets, networks, and other technologies. We break this space into four categories:
Wallets & exchanges: Exchanges are platforms that facilitate the buying, selling, and trading of cryptocurrencies and digital assets. Wallet services help users store, send, and receive crypto.
Decentralized finance: Permissionless financial services that are built on public, open-source blockchains.
Institutional services & infrastructure: Crypto services for financial institutions such as custody, brokerage, securities lending, and capital introduction.
Layer 1 & Layer 2 scaling solutions: Smart contract platforms that serve as the transactional or scaling layer on which applications can be built. Scaling solutions (also known as Layer 2) are secondary protocols that offload the computational power and transactions from Layer 1.
Industry Drivers
The continued digitization of economies and the need for secure and rapid electronic movement of assets or payments could drive adoption of digital asset systems.
Web2 companies of all shapes and sizes are exploring Web3 strategies and ways to capitalize on customers migrating to a new web experience. Companies that help them achieve this will become integral with the new web’s digital infrastructure.
Web3 is still in its infancy with limited computing power. Companies that quickly bring the complexity and power that consumers enjoy in Web2 to Web3 will be essential to the builders of Web3.
Key VC-backed players from 2021 deals
FTX - crypto wallets & exchanges, raised $1B, investors N/A
Celsius - crypto wallets & exchanges, raised $884M, investors N/A
MoonPay - crypto wallets & exchanges, raised $555M from Coatue and Tiger Global
BlockFi - crypto wallets & exchanges, raised $00M from Hedosophia and Third Point
Circle - institutional services & infrastructure, raised $440M, investors N/A
Payments
Overview
We break up payments into the following categories:
Payment platforms & POS (point of sale): Payment-accepting services including payment processing software and APIs, online gateways, physical card terminals, and omnichannel payments.
Payroll & AP/AR automation: Software that helps corporate finance teams and accountants manage cash flow regarding payroll, invoices, and collections.
Business products & services payments: Services that facilitate transactions between businesses. These services can address ACH, wire transfers, and digitized forms of paper checks and cash.
Cross-border & FX: Companies that facilitate cross-border transactions, including currency exchange services that allow businesses to settle with local currencies.
P2P & remittance: Services facilitating P2P transactions including remittances and other noncommercial transfers of money.
Industry Drivers
The online economy has driven the need for complex online and omnicommerce payment systems that enable businesses to accept payments online.
Basic payment processing is highly commoditized, driving providers to lower-cost payment processing services.
Merchants are increasingly upgrading to POS platforms with business and customer management tools, with payment security and fraud monitoring features included.
Improved access to currency markets has forced money transfer companies to accept lower spreads on exchange rates and pass more savings along to customers.
Key VC-backed players from 2021 deals
Mollie - payment platforms & POS, raised $806M from Blackstone
Stripe - payment platforms & POS, raised $600M, investors N/A
ServiceTitan - payment platforms & POS, raised $500M from Sequoia and Tiger Global
Brex - B2B payments, raised $425M from Tiger Global
Deel - Payroll & AP/AR automation, raised $425M from Coatue Management
Financial services IT
Overview
Financial services IT companies provide core banking and other software solutions to help banks improve internal operations and offer modern digital banking products. Examples include cloud-hosted banking platforms, online and mobile banking applications, infrastructure modernization services, and BaaS. We break this segment into two categories:
Platforms & APIs: These applications typically connect nonbank providers with banks, credit unions, and other financial institutions to offer banking services or access financial data to customers.
Enterprise architecture: Startups helping FIs upgrade and manage their tech stacks whose legacy systems have trouble adopting new applications
Industry Drivers
While some regulation has stalled growth, other regulation has presented significant opportunities for disruption. Making data a consumer-owned asset, as opposed to a bank-owned asset, opens the door for fintech innovation (open banking).
BaaS (Banking-as-a-Service) has paved the way for new banking business models. BaaS allows nonbanks to launch banking products easily and quickly without needing to obtain banking licenses or regulatory approval (both tedious and time intensive processes).
Modernizing banks’ middle and back office operations still requires much heavy lifting. Many of the underlying networks and infrastructures that financial services rely on were built several decades ago.
Key VC-backed players from 2021 deals
DriveWealth - platforms & APIs, raised $735M, investors N/A
Plaid - platforms & APIs, raised $425M from Altimeter Capital Management
MX - platforms & APIs, raised $300M from TPG
Mambu - enterprise architecture, raised $266M from EQT
Solarisbank, platforms & APIs, raised $225M from Decisive Capital Management
Looking forward
A few notable trends have emerged that TheVentureCity finds interesting
We have been a long time investor in fintech, amazed by the pervasive applications it can provide and value it can bring. We believe fintech will continue to be a global driver for businesses and individuals (particularly underrepresented ones) to participate in global economies, reach new customers and markets, and make product experiences more frictionless. Below are a few key trends we have explored deeply, and in some instances invested capital towards.
Ethereum scalability
Our fund acknowledges the initial use cases of crypto and blockchain (digital money, digital assets) and is looking towards how companies will be built in the future. With the information we have available today, it appears the most adept L1 chain to build upon is Ethereum due to its adoption by the Web3 community and features that make it easy to build protocols on top of it. However, in its current state, Ethereum is unable to deliver the same complexity and throughput power we are used to from Web2 systems. Therefore, the Layer 2s that help Ethereum reach computing parity to the likes of Web2 will be incredibly valuable to the future scalability of Web3.
Crypto/defi as a path for financial freedom in emerging geographies
Many third world country inhabitants have been limited in prosperity and immersion in the global economy because their national ecosystems have not created adequate financial tools for them to leverage. We strongly believe that crypto will be the gateway to allow individuals in these countries to participate in the global economy and build savings and wealth.
Transforming legacy financial institutions through financial services IT
Despite a plethora of competitors eating into banks’ revenue lines, banks still own most of the customers in established nations. The companies that help banks build digital tools to compete with new entrants can profit off the business models and customers banks have owned for decades.
VC perspective…
There is tremendous activity in fintech, with so many interesting applications for technology to help individuals and businesses improve their lives and P&L. A founder described a world view to us that we think is worth sharing: investing for a world grounded in contextual finance.
Contextual finance is the notion that whether for an individual or a business, finance moves from the foreground to the background, and customers or users go about their lives without thinking about financial transactions.
This is already happening at scale with payments, but imagine if this was the case with massive financial transactions: like buying a home or receiving a business loan. The way fintech is growing, this could soon be a reality, and we are investing in the companies to realize this vision.
