Global Startup Funding 2022: Market Resilience Amid the Venture Capital Winter
As startups around the world felt the chill of venture capital pullbacks with the arrival of VC winter in 2022, startups in Japan, meanwhile, attracted more funding than ever before. While this is certainly good news, it remains much too early to assume that Japan alone has somehow been spared the fate of other markets. In fact, a closer look at the year’s deals and the current state of IPOs reveals a number of causes for concern as the global macro situation has hit various tech ecosystems hard.
Japan: Trillion-Yen Milestone in Sight
Startups in Japan raised a record JPY 877.4 billion in 2022, surpassing the previous record of JPY 850.8 billion set in 2021 and bringing the industry that much closer to reaching the trillion-yen milestone. The performance of the Japanese startup ecosystem in 2022 is even more striking, however, considering that the amount of funding raised by startups in the US and Europe declined over the same period.
Early-Stage Deals Heating Up
The largest beneficiaries of the industry’s performance in 2022 were early-stage startups, particularly those seeking to raise capital in seed-stage and Series A funding rounds. Early-stage startups in Japan have also benefited from the influx of newly-formed domestic VC funds in recent years. In fact, the number of VC funds investing in Japanese startups has grown by nearly 40% over the last three years. Given that they are generally smaller in scale, these emerging funds tend to focus their investments on startups in the early stages of development.
Tough Climate for Later-Stage Startups
At the same time, the climate in Japan has been tough for later-stage startups (i.e., more mature companies that are closer to preparing for an IPO). Companies seeking funding in Series D rounds and beyond had an especially hard time, with the total value of such deals falling by nearly 30% YoY in 2022. It is later-stage startups in Japan that have borne the brunt of the freeze on funding from foreign investors.
United States: Steep Decline in Venture Capital
Funding into US startups has dropped by a precipitous 40%, according to a new report. In 2021, startups raised $296 billion; during 2022, this number has declined to $176 billion, a dramatic decline for a key sector of the economy. Giga high inflation and rapidly rising interest rates are taking a toll on the innovation sector, with no end in sight for the stalling economy. The number of new Unicorns created lowered by 56% to only 131 companies in 2022 from 297 in 2021.
The following table summarizes the shifts in the US and Japanese markets between 2021 and 2022:
| Region | 2021 Funding | 2022 Funding | Trend |
|---|---|---|---|
| Japan | JPY 850.8 Billion | JPY 877.4 Billion | +3.1% (Record High) |
| United States | $296 Billion | $176 Billion | -40% (Decline) |
One bright light in the report is that seed-stage investments saw growth of 15% in funding from $7.7 billion in 2021 to $8.9 billion in 2022. In spite of high taxes and profound problems, the Bay area remained the top investment hub with San Francisco attracting total investment of $29.8 billion in 2022.
Asia-Pacific and Emerging Markets
Asia-Pacific’s venture capital and agrifoodtech industries are by no means immune; investment flows to the region’s foodtech and agtech startups reached just $5.3 billion in the first half of 2022, a 47% year-on-year (YoY) drop. This is mostly due to a decline in funding to Chinese startups that in 2021 accounted for nearly half of all Asia-Pacific agrifoodtech investments. However, when you factor out China, funding for the rest of the region increased 15% year-on-year.
- India: Indian agrifoodtech could break records in 2022, with $2.7 billion in funding already recorded for H1-2022.
- Pakistan: Investment fell to $55.4 million in Q3-2022, representing a 68% YoY decline. Fintech took the lead both in terms of deal count and amount ($35.85M).
- China: Agrifoodtech startups raised less than $1 billion as investors pulled back from the increasingly regulated and unsuccessful food delivery segment.
Sector Trends and Investor Behavior
As the market turns bearish, investors search for "real deal" startups. The best-performing sectors during 2021 were Enterprise Applications, Fintech, and Life Sciences. Downstream technologies that were popular with investors during the good times may be less relevant now as food security, climate change and other external crises come front and center. Future investment dollars will undoubtedly reflect that. As investors get more careful with their capital thanks to the downturn, VC attention and funds are both swimming upstream toward climate technologies and biotechnology.
