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2021 was a year of transformations. 

In many ways, we saw the closing of a two-year cycle of shifting centers of balance. We shifted from a society naive of a pandemic to one with endemic COVID.  We saw some of the resulting shifts reflected in new conditions for investors. For example, the US IPO market, for several years quite sluggish, came roaring back in the last 18 months. The Chinese IPO market, which attracted a number of investors over the last decade for its vitality, slowed. The US federal government made a major style shift from Trump to Biden.

The all means 2022 is setting itself up as a new season, with a new work-life balance, a new hybrid work culture, and new economic landscapes.

For investors in 2022, we predict a renewed urgency to focus on investments that matter. 

Think of this as “great returns with…” Investors are no longer content with strong returns. The recent past has taught many returns need to be conditioned with a point of view and sense of long-term stability. Savvy investors in 2022 will insist on a side of –pick your favorite– social justice, gender equity, racial justice, climate change, human performance, colonizing space, etc. (Clearly not all points of view necessarily have to be positive, we just are bullish on the trend that investors are picking corners this year.) This sense of “Returns Plus” resonates in the M&A transactions in 2021 too. According to Bain, “to compete, successful companies are expanding their M&A capabilities to address challenges in talent retention, revenue synergies, and ESG value creation.” 

So what does this mean for early-stage venture capital in 2022?

Going into this year, venture-backed companies had a record year meeting the public markets, both through IPOs and SPACs. The top category of company in an IPO or a SPAC for 2021 remained B2B Saas, which is Valor’s core investment sector.

New public companies from 2021 are now active acquirers of smaller, fast-growing B2B SaaS companies like those in early-stage portfolios.  2021 also saw a boom in M&A, with many of the largest deals ever seen. Consider the $29B Square-Afterpay merger, the $14B McAffee deal, $5.3B KKR-Cloudera; or $4.5B Cisco-Acacia. All in all, there were over 20 tech-oriented M&A deals over $1B. This hot M&A plus IPO market is changing the landscape downstream, in early-stage venture capital.

Here are our predictions for venture capital in 2022.

1. Seed stage capital pricing power shifts to the VC 

In this feast of tech-eating-tech, seed-stage capital under management continues to shrink as a percentage of overall VC. Yes, you read that right. In a time of unprecedented need for tech and innovation, there is less capital available than ever as a percentage of the whole that invests in the foundation of the growth pyramid, seed stage. 

This puts Valor in the sweet spot as a provider of essential, first-round capital in the fastest-growing venture ecosystem in the country. It also pushes corporate acquirers to fish further and further upstream in the innovation river, which also ultimately favors the seed-stage or early investor.

In 2021, VC dollars were a record $93 billion in early-stage, a fact that took the headlines but did not provide investors much context. The situation is much more nuanced. A handful of multi-billion-dollar mega-rounds skewed the numbers.  The median early-stage valuation during COVID times looked like it jumped from $15 million to $26 million.  Yet that’s just an average.  The impact of all-time record mega-rounds overstated the early-stage valuation picture quite materially for 2021.  The bottom line? Last year, as well as into 2022, seed-stage continues to see a majority of deals well below the $15 million valuation average benchmark which has held steady as a national average for years. 

With this backdrop going into 2022, Valor focused on five themes to mine value in this unusual, dynamic, and exciting venture capital climate. 

2. SPACs and IPOs Fuel an Unprecedented Acquisition Market for Smaller B2B SaaS Firms

Upstream liquidity brings acquirers downstream to high-growth SaaS companies with some critical mass, which means $15M-$20M ARR and up in SaaS. These are the kind of companies Valor builds from the seed stage. What does this mean for smart founders in 2022? 

  • Learn the basics of negotiating an LOI earlier than many on your board of advisor circle will counsel you. 
  • Get multiple term sheets for your A.
  • Start relationships with potential acquirers sooner rather than later, to make a competitive acquisition more likely.

Want to hear how this is playing out in real-time? Join Valor’s general partners for the Valor Visionary webinar series, where some of our fastest-growing founders share real insights on their growth (and take questions from founders and investors in the audience).

3. Location Takes A Back Seat To Innovation

Thanks to COVID, talent and the tools to manage talent have now been fully remote-enabled.  Access to talent from anywhere has never been easier, especially for tech companies who are not in Silicon Valley. No longer does top talent need to be convinced to move from San Francisco or Palo Alto to the South.  Instead, the Valley talent is willing to remote work for innovative companies in the South that were previously geographically undesirable.  For example, Valor GP Renee Montgomery films TMZ Sports daily from Atlanta–but the studio is based in LA. She was their first remote host hire.

Valor is thrilled to see this trend providing a tailwind to our portfolio companies. What does this mean for all founders in our region in 2022?

  • You don’t have to relocate to find your best talent. 
  • With remote tools, connectivity, and hybridized working environment of 2022, the world’s talent is within reach like never before.

4. New Startup Ecosystem Seizes Center Stage

This trend of innovation first, location second, has changed the geography of startups forever.

Where’s the top talent and top environment to invest in venture capital in 2022?

Unequivocally Atlanta.

On the one hand, you have a series of local multi-billion transactions like Mailchimp’s acquisition by Intuit, SalesLoft’s partnership with Vista, Calendly’s recent $3B valuations, and other recent unicorns like Flock Safety, Stord, and Fullstory. Now add big investments like Blackstone’s in Spanx, which is part of a rush of large tech firms in the South. You can see this trend in the new logos cropping up in town, like Rivian ($5 billion dollar plant), Amazon, Microsoft (15,000 people), Invesco, Google, G2, and Hello Fresh. 

These companies know what the new U.S. Census revealed–the South region is home to 40% of the U.S. population and has the greatest density of population diversity. 

What the South region doesn’t have yet? Venture dollars that are commensurate with the tech opportunity and booming growth. This gap, which Valor is working to fill, currently limits the number of companies funded at the seed stage. 

5. Web3 Deepens Southern Roots

If you were on VC Twitter or an avid reader of any tech publication in 2021, seeing the phrase web3 was inevitable. Web 3 is composed of ideas all pointing in the direction of eliminating the big middlemen on the internet. These core technologies are NFTs, decentralized assets, crypto, and the metaverse. 2021 saw Miami assert itself as the regional web3 center.

The dispersion of web3 innovation will take the South by storm in 2022 as education, funding, and FOMO ramp up within the rapidly evolving web3. Valor predicts several household enterprise names will dive into the space of crypto, NFTs, and metaverses, seeking to solidify their positions as forward-thinking innovators. Expect cities rooted in rich culture with ripe tech ecosystems to emerge with a flurry of web3 activity over the course of 2022.  Atlanta, Austin, Raleigh, and others will challenge Miami and make Web 3 another big tech export from the region to the world.

6. Corporates turn to more innovation faster to fuel growth

True innovation within the enterprise is nearly impossible at the scale true global leaders operate.  Enterprises are trying to figure out how to engage with innovation through outside avenues more aggressively than ever. Most companies are trailing in what they have in-house to make them more efficient, effective, and competitive. COVID has created a global talent war that now fuels a global rush to customers. With the talent shortages and the past push of outsourcing tech talent, today’s cash-rich but talent-starved companies have a gap in the ability to deploy or engage with new offerings. 

We see the lowest hanging innovation opportunity within any enterprise is ‘what to do with all the data they have and how to minimize risk in anything they do or offer. In other words, making a more intelligent company faster through AI/ML, creator economy platforms, Web3 technologies, and next-generation fintech and cyber security. 

For founders, our guidance is, focus on making it easy to onboard fully vetted solutions at an enterprise scale. The regulated enterprises are the ones struggling the most. To take on new capabilities, they have to figure out how to migrate from the old to the new and have an audit trail in doing so. Entrepreneurs who bring a new, more automated lens to solving these challenges will help shift the corporate struggle and can find multi-million dollar contracts on the table quickly. 

In other words, 2022 will make 2021 look slow.

  • We invite you to join our pacesetters in a new series of webinars with founders on the frontier of change in 2022. Check out the Valor Visionaries series.