The collapse of the digital world in 2022 (large-scale layoffs by big tech companies like Meta, Twitter, Google and Amazon, as well as a slowdown in funding for startups) after the euphoric highs of the year 2021 from Covid is more a course correction than a reason to worry.
If we look at the numbers, 2021 stands out as an abnormal year. Total funding in October-December 2022 showed a massive 71% drop to $3.3 billion from $11.5 billion during the January-March period, according to Tracxn data. Similarly, total funding in 2022 was down 37% to $25.9 billion compared to the prior year. In contrast, 2021 saw total funding of $40.8 billion, which was not only more than 200 times higher than 2020, but also the highest in a decade.
Analysts see the decline more as a return to the “normal” levels that prevailed in 2019 before the pandemic.
They expect the trend to continue from now on, with funding activity in 2023 generally holding at 2022 levels.
“Funding activity in 2021 was a huge spike and it was an abnormal year. Activity that year was driven by the low cost of capital and Covid-led exuberance for tech companies. In terms of funding activity, 2019 looks like a fairer comparison,” said Rahul Chowdhri, partner at Stellaris Venture Partners.
A similar return to pre-pandemic normalcy is underway in the world of big tech, where hiring in some cases during Covid times increased by 100%. “Covid benefited these (big-tech) companies immensely as consumer engagement skyrocketed. What they would have accomplished in five to 10 years, they accomplished in five to 10 weeks. With people returning to the offices, the party is ending and it’s the start of a tech winter,” said Manish Maheshwari, former CEO of Twitter India. Citing Twitter India, he said the staff in 2019 was just a handful, but increased to 230 by 2022.
Nick Clegg, president of global affairs at Meta, also recently said that big tech companies had seen strong growth during the Covid years and hired a lot, but as the pandemic receded, growth normalized, forcing companies to lay off staff.
“By 2023, the deal flow will continue in the early stage because risk is low and check sizes are small, while equity funds have increased. On the other hand, growth-stage and late-stage investors, who are fueled by foreign capital, will be affected by what happens in their own jurisdictions. Therefore, it is likely that it will result in a contraction next year,” said Anup Jain, managing partner at Orios Venture Partners.
Vivek Soni, a partner in private equity services at EY India, said that the January-March quarter of calendar year 2023 may see increased activity because deals that took longer to close in 2022 will materialize during that period and can only be established. a clearer trend after that.