Like all industries, venture capital is not immune to the overall market uncertainty that dominated the second half of 2022 and has now spilled into 2023.
According to research firm Preqin, venture capital investments last year experienced the sharpest drop in 20 years, equating to a year-over-year difference of $286 billion. On a global scale, deal executions were down a staggering 42% in the first three quarters. These significant dips in activity indicate that investors continue to be more cautious with their money.
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While the current climate of venture capital investments could appear all doom and gloom from a first glance, history has shown us that in these market conditions, great opportunities for investment still exist.
In just the past 20 years, we have seen downturns in the market that have provided actionable tips for navigating the present. In just the 2000s, we have experienced multiple spurts of economic difficulties; however, these periods presented some of the best conditions for venture capital firms to build their portfolios by specifically targeting early-stage companies.
Although early-stage companies are often considered the highest risk, they do present the most rewarding opportunities. By jumping in at the ideation phase, venture capital firms that have the know-how to build early-stage companies can leverage their industry-specific connections with “strategics” and provide guidance with minimal capital infusions to foster the company’s growth. This level of oversight and leadership of a young company can produce significant money-making opportunities as the portfolio matures or through either M&A or IPO prospects when the market self-corrects.
First- and best-in-class investments
Early-stage investing will be a key to surviving this most recent market dip, bthe companies selected for investment must also be identified as both first-in-class and best-in-class. Very good companies will continue to raise money no matter the economic climate. While raising money is extremely important, it is not the end goal for successful returns.
It is critical that venture capital firms engage in market conversations with strategics to understand the strategic institutional players’ goals for their own portfolios. Industry-specific giants will look to acquire companies that not only fill a need and will service the widest selection of people, but also offer the most cutting-edge technologies. Venture capital firms should spend the time now, while the market is in a downturn, to identify and foster the maturation of these companies. When the market corrects, the early-stage company that is producing a best-in-class product will be primed for acquisition by strategic industry players.
Applying just one of these factors will not be enough to successfully navigate a downturn. Overall competition in the market naturally weans itself as a lack of funding impacts often newer and stagnant firms in challenging economic conditions. With a perfect storm of high inflation rates and talks of a recession looming, top players will understand how to navigate the market by seizing early-stage companies that are both first-in-class and best-in-class to build their portfolios for years of successful returns.
Eyal Lifschitz is the co-founder and managing general partner of Peregrine Ventures, a global investment firm for the health care sector. In this role, he oversees all daily operations and mentors entrepreneurs on their journeys to bring innovative medical technologies to market.
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