Venture capital (VC) firms continue to pump money into tech firms even as startups are considering alternative financing mechanisms. According to a pitchbook report, this trend includes a record increase in pharmaceutical and biotechnology investments. Business-to-business (B2B), business-to-consumer (B2C) and FinTech technologies are maintaining the momentum that started at the end of 2020.
Will the tech investment frenzy of venture capitalists continue?
It certainly sounds like a good time to be part of a tech startup.
Wave Capital Partners, an investment banking consultancy that advises technology companies on raising capital, believes the trend will continue for the near future. However, they are quick to recognize some concerns about inflation and other factors.
Recently, Garrett Boorojian, Managing Partner of the Firm, participated in a question-and-answer session on the same subject. Boorojian’s ideas appear below.
The influx of tech venture capital has been huge over the past year. Do you see this trend continuing until 2022?
Absolutely! Tech venture capital is a necessity, and the trend of venture capital investment will continue into 2022 and beyond, as “the present” is also “the future”.
Most tech companies
In no particular order, Washington state, California, Texas, Florida, North Carolina, New York, Georgia, and Michigan are the states in the United States that most tech companies have made their home.
Various technological activities
The VC tech space plays a major, perpetual and holistic role in funding various technological initiatives. Launching start-ups and start-ups that make positive differences and change the life of society is the essence of entrepreneurship in any industry, including the world of technology.
The VC tech space also provides the vehicle for the large-scale growth of a product, service, application, type of software, medical device, or any other related capability. technology. Today’s technology venture capital investments will create a new supply to meet the new demand of tomorrow in the industry.
What are the areas of technology that venture capitalists are most interested in right now?
Lately, PropTech and FinTech. Other areas in which investors have a significant “eternal” interest are technologies which encompass healthcare, energy, artificial intelligence (AI), information technology (IT), cybersecurity, augmented reality (AR), the Internet of things (IoT) and consumption. based products and services.
Technology – the central element
As long as technology is the central element, the business models of tech start-ups and start-ups must demonstrate all the necessary elements that attract the right tech venture capitalists to be the first backers of companies.
Strong executive leadership
Suppose investors see that a particular tech company has the potential to go public in the future, in addition to its need for capital and other value-added resources and expertise to grow. In this case, strong management and advisory board teams need to lead and advise the business from the start.
What attracts investors to FinTech and PropTech before many other fields?
Investors are drawn to the convenience, functionality, and monetization of the methods and systems that technology companies can provide to consumers nationally and globally. Specifically, investors are aware of continuous modernization through technological breakthroughs in the world of real estate and financial services.
Better ways to manage, save and spend money
Investors, including venture capitalists, hope to deploy capital in these technological areas if there are indeed smarter, more efficient and more innovative ways for consumers to live, work and play. They also want to invest in better ways to manage, save and spend money.
The accessibility quotient affects how quickly and successfully consumers can connect to user-friendly platforms in a flourishing technological environment. It may help to remember that investors in FinTech, PropTech, and other tech fields are consumers, too.
What macroeconomic factors do you see influencing the availability of capital over the next 12 months?
If inflation continues to rise, the Federal Reserve could hike interest rates twice by early 2023. The legislation that US President Joe Biden will eventually enact will also dictate the availability, or lack, of capital. less expensive capital over time.
Start-up founders are looking for available capital now
Start-ups and start-ups should come before venture capital and private equity (PE) firms simply because the capital is available now. Entrepreneurs who need venture capital investments in their businesses cannot afford to think that the money at an achievable cost now will still be there in six to 12 months.
Entrepreneurs must continue to develop
Fortunately, the economy is still growing. Labor and material shortages still exist, but everyone hopes that these two dire situations will soon be resolved. Suppose interest rates rise in the future. In this case, inflation will come down, but it should not get to the point where companies are discouraged from hiring key people to help them manage and run their entrepreneurial businesses. Our economy cannot afford its entrepreneurs to stop expanding their operations or at least be reluctant to take on more venture capital or private equity, or debt of any kind, at critical times of growth. their businesses.
Additionally, from a macroeconomic perspective, natural disasters and other inevitable disruptive events could restrict access to capital and affect the financial portfolio of anyone on Wall Street or Main Street.
Could the rate hike or tax reform lead to tighter availability of VC?
Yes and no. The Biden administration proposes an increase in the long-term capital gains tax rate for Americans earning over a million dollars and corporate tax rates and closing the deferred interest loophole.
There is a division related to the overall assumption within the venture capital community as to whether or not these proposed changes will slow down venture capital investment.
Increase in the capital gains tax rate?
Along with the PE groups, many venture capitalists that backed President Biden during his presidential campaign are opposing the increase in the capital gains tax rate. They believe this increase will hamper long-term investment opportunities and slow economic growth as our country tries to recover from the pandemic.
Others in the venture capital world – albeit in the minority – believe these legislative proposals will not stop investment in start-ups and start-ups if they are enacted. President Biden’s agenda and other investors are not surprised. In fact, they had already anticipated the ongoing conversations between the President and Congressional leaders in Washington, DC.
Beyond inflation issues
Regardless of political preferences, no one wants to see inflation rise to a level where the acquisition of capital becomes more expensive. Higher inflation would lead to a significant drop in yields and falling profits for venture capitalists. An increase in inflation would lead to a decrease in competitiveness in many industries across America, potentially in the tech space as well.
If higher inflation occurs – whatever the challenges – venture capitalists should always be available to invest and help grow tech-related businesses.
If tech companies grow and make enough profit to go public, our economy benefits when these new state-owned companies raise even more capital to create more jobs.
A slight increase in inflation is sustainable, but not to the point of overvaluing any sector of the economy. Venture capitalists are part of the bridge that helps a start-up find its way into a large public company. Overvaluation would collapse that bridge.
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