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Managing market volatility: The VC perspective

There’s no doubt that this past year has been quite a rollercoaster. 

We began 2022 on a high. There was a buoyant feeling of optimism within the startup community after an incredibly exciting and record-breaking 2021. During 2021, more funding was raised than ever before, ecosystems across Europe were skyrocketing, and a culture of innovation was nurtured. 

This year, though, things have been a little different. Wider political, socio-economic and environmental challenges have been felt and it’s left a taste of pessimism for some investors. Whilst funding levels have remained high and we’ve seen plenty of exciting activity, there has been a grey cloud shadowing things to an extent. Global stocks have dropped and due to a myriad of influences, such as the Russia/Ukraine Conflict and inflation, this recent surge in market volatility has left even the hardiest of investors feeling a sense of unease – but it doesn’t have to be that way. 

We chatted with Tom Henriksson, General Partner at OpenOcean, to take a look at how startups and investors can be resilient and make the most of the current rollercoaster. 

Tom, how have you and OpenOcean experienced the current market mayhem?  

What we’ve witnessed over the past two years in the venture capital space is, in various forms, inflation. Whether it’s startup valuations, fundraises, or market multipliers. Seasoned practitioners in the ecosystem comprehended that these numbers were unsustainably high and would not last. We are witnessing a correction and a return to ‘more normal’ levels. 

As such, our strategy remains consistent. As a firm, we will continue supporting founders who are integral in building the future data economy with advanced but easy-to-adopt business software. However, it must be noted that due to the market’s cooling period, we are applying maximum care when valuing new ventures to back, and ensuring that OpenOcean’s portfolio companies possess the requisite funding to achieve their goals.

How is OpenOcean supporting its portfolio startups during this time?

The first steps we take to support our portfolios in these unstable market conditions always begin during a board-level discussion, focusing our efforts on the processes needed to secure the company’s future. As a result, our portfolios are working to shore up their business model to endure a potentially austere period of 12-18 months, focussing on realistic revenue and cost basis, and cash burn rates.

What are the implications of all of this on the data economy? 

The data economy has felt the same market re-adjustment as the rest of the VC ecosystem. Whilst leaders within the sector will need to understand the long-term projections of their financial state, startups that ably solve everyday issues for businesses, and can make their customers more efficient, will come through the next year unscathed. 

At OpenOcean, we are confident about our data economy startups because they all solve fundamental problems. That’s at the heart of venture capital: identifying those enterprises that slot seamlessly into the modern business landscape, whether that be the nascent data economy or elsewhere. No matter the market conditions, core pain points will persist and will need to be fixed. As a result, investment into the data economy will only increase as these startups bring forth the new frontier of tech. 

What long-term impacts for startups do you foresee? 

While the general mood within the VC ecosystem is a patient ‘wait-and-see’ attitude, we do expect a more challenging business environment to emerge in the short term. From 2022 to at least the end of 2023, it may require more effort for startups to fundraise than during the ‘inflated’ previous three years. 

Aside from the general market conditions, external factors such as geopolitical crises or runaway currency inflation will also impact the demand for various software solutions.

Which ventures will perform well or poorly over the next two years? 

Raising capital to continue rapid growth will either require ventures to have exceptional growth economics or to possess unquestionably sound technological foundations. The success of ventures over the next two years will depend heavily on startup revenue growth and burn rate. Unfortunately, startups with low growth and high burn rates will most probably fail, as capital efficiency of growth will be essential in overcoming the challenges that the next year or two will bring. Though, we must note that there are always exceptions to every rule.

The most attractive ventures sit within the problem they solve, not the market situation. If a startup creates a solution that solves a fundamental problem, they should ride out market turbulence – so long as they keep burn rates realistic and ensure solid revenue growth.

Patricia Allen
Patricia Allen
is the Head of Content at EU-Startups. With a background in politics, Patricia has a real passion for how shared ideas across communities and cultures can bring new initiatives and innovations for the future. She spends her time bringing you the latest news and updates of startups across Europe, and curating our social media.

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