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November 30, 2022

Where will VCs deploy their dry powder?

Max Ruderman
CEO, Harmonic

Where will VCs deploy their dry powder?

Answering this question has historically been a shot in the dark. You could aggregate announced fundings, but that would only tell you what’s already happened. And announced fundings lag behind closed investment rounds by months, and frequently quarters.

At Harmonic, we track 6M+ companies, and find fundraising rounds when they close, often months before they’re announced. But we can do better than that. These rounds still close months after conversations begin, begging the question: can we find which companies VCs are looking to fund, before they fund them?

Harmonic has over 1k private market investors with $270B in total AUM who depend on our startup search platform to discover startups, creating troves of data.

Can this search data predict future funding activity?

This would be a pretty lame blog post if it didn’t! Check out how our search volume by industry has correlated with past funding rounds. We’ve included data for all of our highest volume industries below, offset by what we believe to be a typical time frame of 3-4 months between finding a deal and closing a round.

Based on this data, it appears search volume in Harmonic for a given sector is a leading indicator for capital deployed into that sector. 

The next question naturally is: what are VCs looking for now?

We’ve dug into the most popular saved search queries over the past 6 months to better understand what investors are looking for, and how that might impact the markets in the coming months. Here’s what we found.

graph source:

Amid a funding environment that’s cooling overall, SaaS, fintech, edtech and e-commerce appear to be receiving an increased share of investor attention.

SaaS—a VC stalwart that vacuums up billions in funding every year—saw a 4.03% increase in VC search volume over the past six months. Per recent Silicon Valley Bank data, there’s more than $550B in VC dry powder ready for deployment into SaaS startups. While the SaaS sector has been disrupted by the macro economic environment, deal volume in SaaS hasn’t seen the same rate of attrition as other sectors. Notably, SaaS is the most searched-for sector for VCs on Harmonic—capturing 20% of all searches as of November 1. Fintech and healthtech were the next two most searched-for sectors, with 14.3% and 12.50% search share, respectively (fintech rebounded after cooling during the summer months). 

Edtech is the fourth-most searched-for sector as of November, after seeing a search volume increase of 1.35% over the past 6 months. Interestingly, the edtech sector has been largely quiet in 2022 after a flurry of major exits in 2021, including Duolingo, Coursera, and Udemy.  The price per share of those exited companies is today down 59% on average. Could the increase in search volume be the harbinger of a new ed tech investment boom?

E-commerce search volume saw the largest gain over the 6-month period. This spike in VC search volume comes amid layoffs at Amazon and broader concerns around consumer spending heading into the holiday season. That being said, digital spending is still expected to grow by more than 6% in December, and e-commerce sales have seen a permanent post-pandemic boost, as online shopping becomes more ingrained in day-to-day life. As such, investors appear bullish that e-commerce will be a worthwhile investment in the months to come.

Of all sectors that saw a decline in search volume, biotech, aerospace, and crypto were hit hardest. This is not entirely unexpected, given biotech and aerospace are capital and research-intensive industries with longer investments horizons. In this period of quantitative tightening, it appears VCs may be looking to allocate capital into sectors with lower capital requirements and shorter investment horizons.

Search interest in crypto startups has cratered amid prolonged headwinds for cryptocurrenies and Web3—something that could be further hampered by the recent unraveling of crypto exchange FTX. Crypto startups made up only 1.79% of all Harmonic searches by VCs as of November 1, the second lowest mark after aerospace (1.34%). Even still, crypto VC funds are sitting on billions in dry powder that could be deployed in the coming year. Where and how that capital is allocated will be a key trend to watch heading into 2023.

CPG also saw a pronounced 7.67% decline in search volume during the measured period. The decline in CPG interest among VCs comes amid rising inflation and price increases for consumer goods. It’ll be interesting to see if CPG can rebound during the holiday season, or if rising prices prompt consumers to scale back spending.

Overall, the current search trend data in Harmonic paints a picture of investors adapting to a new market. While historically popular sectors like e-commerce and SaaS largely remain top-of-mind, our funding data shows VCs remaining cautious with their dry powder as the market experiences a period of prolonged volatility, during which more than 70k tech workers have been laid off. 

But this mass exodus of tech talent will undoubtedly usher in a new generation of breakthrough tech startups in the coming months and years. If you’re an investor looking to discover and fund these startups, consider trying Harmonic. And for more insights into the tech ecosystem, sign up for our mailing list!

Max Ruderman
CEO, Harmonic
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