VC Exit Activity Drops Amid Slowdown in Ecommerce Software Funding

According to Politico, inflation in the United States inflation reached 9.1% in June 2022, the highest level it has been in 40 years. Not surprisingly, this has forced already cash-strapped Americans to reduce their spending on discretionary items.

For the retail industry, this means a drop in sales of items such as gadgets, furniture, and even clothes. A few days ago Walmart shares nosedived after the retailer announced that it has been forced to reduce prices to prevent stock levels from becoming too high. This is having a negative impact on the company’s profits.

A year ago suppliers couldn’t keep up with the demand for Items such as exercise equipment and electrical appliances. Currently, however, warehouses and stores have excess inventory.

The slowdown doesn’t stop there either. Suppliers of backend services and software to online retail outlets are also feeling the pinch. A few days ago Shopify – one of the top performers during the 2021-2022 e-commerce boom – had to revise its projections downward and posted a loss for Q2. The company also plans to let go of 10% of its employees.

All of this couldn’t have happened at a worse time for the many Software as a Service (SaaS) venture capitalists out there because these startups are heavily retail-focused. In 2021, global venture capital funding in the e-commerce software market reached a record high of $4.8 billion. Although 2022 started off well, a drop in funding over the last few months has more than offset the strong performance of the first quarter.

Venture Capital Exit Activity in the United States Drops to Levels Last Seen Before Covid

Amid a sharp pullback in the stock market during the first six months of 2022, exit activity in the U.S. venture capital market has dropped to only $48.8 billion. This represents a massive pullback from the previous year’s record high. In fact, it only amounts to around 6% of last year’s exit totals.

If the liquidity gap in the U.S. public market remains unchanged until the end of 2022, analysts project that we will see more down and/or flat rounds, with more startups returning to private markets. Apart from that, there could also be reason to worry about the many high-value startups that might find it difficult to obtain crucial liquidity.

During the second quarter of 2022, public listings dropped to their lowest levels in 13 years. At the same time, an increasingly difficult environment for SPAC mergers has caused many canceled or abandoned deals. Acquisitions managed to deliver a steady performance though and pushed exit value back to where it was in 2019-2021.

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The Biggest Venture Capital Investment Winners of 2022

The largest recipient of equity funding in this field so far this year was Salsify, a company that provides tools for brands and retailers that want to boost their e-commerce presence. In April 2022, the firm managed to close on a Series F round worth $200 million.

Other major funding beneficiaries included:

  • Route, a supplier of package-tracking tools for online traders, managed to raise $200 million in a Series B at the start of the year. The Utah-based company’s valuation at the time was $1.25 billion.
  • Cart.com, a firm that develops an analytics platform that helps brands to boost their online growth, raised a whopping $240 million in a debts & equity round in February.
  • Shoplazza, a company from Toronto that markets itself as an e-commerce platform that helps online brands to expand beyond borders, successfully managed to raise $150 million In a Series C round at the start of 2022.
  • Zoovu (based in Boston) develops an AI-enabled platform that helps online buyers to locate the right products and was successful in raising $169 million in a Series C in June 2022.

Interestingly enough, all these companies experienced a few quarters of sharply increasing revenues before news of the financing deals broke. Cart.com, for example, reported a 400% growth in revenue in the 12 months before its latest funding round. And Salsify generated more than $110 million in yearly recurring revenue last year – an increase of 50% compared to 2020.

Market conditions are currently completely different from only a few quarters ago. The surge in online shopping that accompanied the pandemic has since faded away and the market shares of online and physical retail have reverted to more or less where they would have been now if Covid never made its appearance.

A similar trajectory will likely emerge for software startups funded by venture capital. Online shopping will not, as it seemed a year ago, experience astronomical growth. But shoppers have also not abandoned online shopping. The industry is likely to experience steady growth over the short to medium term.

The Bottom Line

There is no need for startups to be discouraged by current market conditions. Simply intensify your capital raise efforts and make sure that your pitch is the one that bowls the investors over. If your startup is looking for Venture Capital but you feel you need a bit of help with your pitch, let Pitch Deck Writer take a look at your current draft, free.