Understanding the venture capital market

The better part of the last year was spent speculating on the spiraling values across the globe for individuals working in the startup or venture capital (VC) market.

In Pakistan, there was some concern about the market’s long-term viability, given the market’s on-the-ground realities, which are far too often outside the control of everyone, including creators, investors, and customers.

According to Crunchbase, global Q12022 financing declined quarter-over-quarter for the first time since at least Q12020. Similarly, the amount of money raised by Asian entrepreneurs has decreased year over year.

Of course, it’s perfectly possible that this slowdown — if we can even call it that — is nothing more than a blip on the radar. It’s extremely simple to cherry-pick data items to support your perspective, regardless of which side of the debate you’re on.

To begin with, 2021 was a one-of-a-kind year, not business as usual, so a minor decline from its peaks — and that, so far, on a quarter-by-quarter basis — hardly indicates a reckoning for the venture ecosystem. Second, the volume of seed and angel deals continued unabated internationally in Q1, reaching a new high, and any retreat was due to late-stage and growth rounds.

That is, a solid pipeline of new startups is still on pace, with much more cash and much higher values than the five-year average.

On the other hand, several of the most well-known VC-backed businesses that want to go public in 2021 have been laggards. Take a peek at neighboring India, where 11 firms have registered (including offers for sale). Seven of them are still in the red, with a median percentage change of minus 33% from their beginning prices. Then there are inflation and central bank rate hikes all over the place, while many investors are apparently negotiating transaction terms.

Whatever you believe, there is a lot of uncertainty about what lies ahead and what it will mean for Pakistan. While the optimists believed our moment had arrived in 2021 and the pessimists questioned its veracity, the middle ground took a more pragmatic approach: raise as much as you can while you still can.

Before investors become concerned with due diligence, they must first consider the local macroeconomic situation and the performance of companies on their radar. Many entrepreneurs heeded the advice and amassed more wealth than they could fairly spend.