Are We Really in an Investors Market?

Are we really in an investors market?

In the investing world, there is no more heated issue than whether economic conditions favor founders or investors. According to a fascinating research note out of private equity data provider Pitchbook, 2023 will be a year dominated by investors. Here’s their take.

Pitchbook’s Broad View

The following figure from Pitchbook depicts their take on the state of the venture capital world according to how favorable economic conditions are to early-stage (green), later-stage (blue), and venture growth stage (yellow) companies.

Fascinatingly, up until the middle of 2022, the venture capital universe was heavily in favor of the startup companies. According to Pitchbook, we’ve never seen a more startup friendly environment than what startup founders saw in the first half of 2022.

But all good things come to an end. And in this case, they changed fast. Since bottoming in the first half of 2022, the environment has shifted deeply in favor of investors. The Pitchbook authors’ report suggests that the current economic environment is so investor friendly that it would be difficult to get more investor friendly. Of the three reported types of venture capital investors and companies, current conditions are most favorable to later-stage investors, with the index value approaching 90. In second place is early-stage entities, with an index value. And rounding out the group is the venture capital growth stage group, with an index value of about 63.

Source: Pitchbook

A Second View – the Capital Demand to Supply Ratio

The next view is the capital demand to supply ratio. This offers an insight into the amount of money startup founders need and how much money investors have available to allocate to founders.

Interestingly, the situation for later stage entities (blue line) is enormous, with the demand to supply ratio at 3.2x. A 3.2x ratio is the highest on record – and by a large amount. Conditions started moving heavily in favor of companies supplying the capital in the latter half of 2022, and the rise has been incredibly large.

Also important is the rise in the capital demand to supply ratio for the other two types of entities – early-stage and venture capital stage. Both have seen their capital demand to supply ratios jump to historically high levels. Interestingly, though, for early-stage and venture growth stage companies, the ratio peaked (recently) at around 1.5x, well below the 3.2x for later-stage entities. And, perhaps more interestingly, the capital demand to supply ratio for early-stage and venture growth stage companies has started to decline in recent month, whereas it has continued to grow for later-stage companies. Hmm.

Source: Pitchbook

Summing Up

Overall, based upon recent research out of Pitchbook, early-stage companies have lost any form of upper hand they had with investors. We’re now in a world where investors can generally demand concessions from founders. This shift may continue to last throughout 2023 or could subside if interest rates lower and economic conditions improve.