Capital Provider Market Sentiment Survey

Conducted by Bigfoot Capital

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July 2023

Survey Purpose

Gather quantitative and qualitative data from software equity and debt investors on:

1. Their market sentiment
2. What it means for their investing activity
3. How they may shift their strategies

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Top Takeaways

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• Sentiment - Recession concerns have abated dramatically from this time last year and both equity and debt investors have shifted to a more positive skew in terms of their ability to deploy capital in the way they’re looking to. That said, there’s still a lot of neutrality as we all continue to wait for better days and investors still expect a lot of pain for a lot companies that have been overfunded and overvalued over the past few years.
• Activity - Non-bank lenders have had the highest uptick in activity year-to-date and have the highest expectations for activity over the next 12 months (by a thin margin over Seed/A and A/B/Growth equity). A/B/Growth equity and banks have shown the most moderation in activity with ~50% reporting being less active YoY. ~80% of respondents expect <25% of portfolio companies will require bridge financing in the next 12 months, and they expect existing equity investors to be the bridge capital.
• Strategy - 15 months into the “reset”, it seems any strategy shifts have already been made. Investors conveyed the same themes they did 12 months ago: 1) raising of the bar for investability, 2) more thoughtful deployment with more discipline 3) focus on fundamentals and health, 4) getting in at good valuations . Growth is still important but has been deprioritized. Investors are looking for more traction, more scale and more liquidity along with less burn.

Survey Participants

61 capital providers shared their thoughts, split as follows:

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Respondents are 67% equity / 33% debt. Equity skews 60% Seed/A. Debt is 95% A and beyond. All B2B focused

Respondents by Assets Under Management (AUM)

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78% of equity investors <$250M AUM, 60% of lenders >$250 AUM

Investor Sentiment - Quantitative

12 months ago, 91% of respondents thought a recession was coming in 12 months.

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Now, that’s 39%. But, 30% believe it’s already here. The rest say “nah, we’re good.”

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So, how’s everyone really feeling?

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Increased positivity for both equity and debt, but ~50% still just kind of meh on the market right now

Now

12 Months Ago

Sentiment Split - Equity vs. Debt

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Equity positivity up from 26% last year. Debt flipped from 80% negative/neutral to 80% neutral/positive

Sentiment - Equity capital providers by stage

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Much more positivity from A/B/Growth equity investors than 12 months ago. Seed/A with a moderate shift

Now

12 Months Ago

Sentiment - Debt capital providers

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Lenders are conveying materially less negativity than 12 months ago with an 80/20 flip to neutral/positive

Now

12 Months Ago

Investor Sentiment - Qualitative

Please provide a short statement about your thoughts on the current market

Seed/A Equity Investors - Positive

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• “Through the worst.”
• “Feels like the market is more active than in Q4'22/Q1'23 and things are starting to pick up for investors.”
• “It feels like there's more wind in the sails these last couple months, especially regarding LP fundraising.”
• “It's the worst capital raising environment for startups since ‘08/9, but amazing if you’re deploying capital.”
• “Much more investor-friendly compared to previous 3-5 years.”
• “Now is an excellent time to be making investments in early stage businesses…Valuations are realistic and founders are more focused on building healthy and sustainable businesses while maintaining optionality.”

Seed/A Equity Investors - Positive

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• “For the most part, early stage valuations have reset. We are seeing a lot of down and flat rounds, despite companies doing fairly well on a revenue/growth side since their last raise. I do think that there is some pent up capital on the sidelines that will need to be deployed for funds to meet their "investment period" and portfolio construction goals, and expect there to be some more deals done after the summer.”
• “In our area of focus (low burn, $1-7m ARR) we are seeing companies elect to lower growth expectations and maintain longer runway / stay profitable vs invest to accelerate growth…Public market valuations have trickled into mid-market SaaS valuations for PE exits (& Series B recaps), resulting in underwriting adjustments at the Series A stage; with growth equity investors having come down market in recent quarters, we're now competing with more majority transactions (also to strategics). I expect further pain in the economy (perhaps driven by commercial real estate or shadow banks) to transpire in the coming year, however, we're seeing more good and great companies coming to market and are aggressively seeking to deploy capital.”

Seed/A Equity Investors - Negative

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• “The last several years were an outlier, and the current market environment is a partial correction to more rational valuations & investment dollars, and companies not executing or operating at a high-level will go out of business & not get funded.”
• “Cash is king. Critical to add capital if possible and to push portcos to extend capital into 2025.”
• “The venture/startup market has changed, but the vast majority of people see this as temporary and aren't adjusting fast enough.”
• “Bad, probably doesn't get worse but stays bad.”
• “Looks like inflation is under control but higher interest rates will be around for awhile - capital will start to flow back into the public and private markets. We might have some valuations increase but moderately. Will likely see more companies go out of business as they still cannot raise the money they need to survive, grow and the buyers' pursestrings continue to tighten into the recession.”

Seed/A Equity Investors - Neutral/Other

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• “Still seeing a lot of activity at pre-seed and seed. A's remain hard to get done. I think there's still an overhang of bridge rounds and extensions that need to clear out before things rebound at later stages. Biggest concern remains raising a new fund in this environment.”
• “Valuations are being cut and down rounds required because many growth companies forgot that cash flow is critical to long-term viability.”
• “Fight or flight. Flight to quality = investors glomming on to any round led by a big multi-stage coastal fund. Fight the market = every investor doing more follow-on rounds than ever before to keep their portfolios alive.”
• “Sluggish.”
• “Who cares?” ←Insightful

A/B/Growth Equity Investors - Positive

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• “Most everything is resetting from all-time highs, but it’s healthy for our ecosystem.”
• “I think the worst is behind us. I think we bottomed in Q4'22/Q1'23. All signs point to recovery.”
• “A lot of companies will need capital in the next 12 months and there's plenty of dry powder out there to invest in those companies.”
• “Labor and capital markets seem to have weathered interest rate increases with improvements to inflation. The # of Seed Stage companies is at a historic high, which should balance out the capital supply dynamics that drove up valuations in 2021 and create a boon of opportunities for Series A investors in the next 6-18 months. IMO Markets will revert to some shade of normal within the next 12 months.”
• “Seems to be more meeting of the minds on value in Q2 2023 than 9-12 months ago. Feels like rates likely to stay higher for longer with next catalyst being a decrease in late 2023/2024 - inflation is probably overstated in latest readings.”

A/B/Growth Equity Investors - Neutral/Other

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• “Deal flow down , but recent thawing and showing green shoots; still hard for high burn companies.”
• “Top 10% of companies coming to market meet all the growth criteria and are getting funded at premium valuations. It's a steep cliff in terms of quality and many of those companies will struggle to find a partner or will have to take aggressive terms.”
• “We are ready to put money to work, but very few companies raising outside capital. Those that do are unwilling to accept 2023 valuations.”
• “Sideways public markets, 2024 probably a year where companies are finally willing to address cap tables are not aligned to business performance.”
• “EBITDA positive companies create their own destiny.” ←Amen
• “Turn off the news.” ←Amen again

Non-bank Lenders - Negative

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• “On fumes. Over concentrated on big tech and AI.”
• “Lots of risks in the world that could affect markets in different ways - tread carefully.”
• “Many private companies and investors are still in denial and applying hope as a strategy, even without a recession there is still a disconnect between public and private valuations that needs to be reconciled.”
• “Worst is still to come. I see a lot of companies that raised in the last couple years that have not executed enough to justify the last valuation and have yet to significantly cut burn to extend runway. As a debt provider, I've also seen a lot of companies that are overleveraged and looking to refinance to delay amortization, finding a cold reception among lenders.”
• One Positive Note: “There are a tremendous amount of opportunities with reasonable valuations.”

Non-bank Lenders - Neutral/Other

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• “Recession on the horizon albeit a light one. Jobs market slow down and inflation being managed. M&A will pick up greatly, Bank lending tightening, Series A/B venture tough to get, Seed will remain solid.”
• “Companies have been overvalued for several years and the market is returning to equilibrium. Many companies will likely go unfunded.”
• “There's clearly a flight to quality with focus on risk and credit strategy.”
• “turbulent. Really good companies are doing well and getting funded. The others are challenged on all sides.”
• “Market has performed better than initial expectations and I think it will be down but not disastrous for the rest of the year.”

Bank Lenders

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• “Beyond discovery mode, we have entered complete irrationality.”
• “Too much noise coming from both directions so it's hard to tell which way we are leaning. Makes me think a safe guess is in neutral.”
• “Fundings have slowed. Post Series B companies are feeling the most pain and struggling the most to raise. Capital intensive businesses are a non starter. CEO's are finding out they should have conducted layoffs sooner and are realizing they can achieve the same results with a lean team.”
• “In the current market, there’s definitely a lot of uncertainty with mixed signals across the board. However, I'm optimistic going forward given technology is a strong & exciting asset class that I see continuing to grow despite the current headwinds we're facing.”

Investing Activity

Investing Activity - All surveyed equity capital providers

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Bucking the narrative, 1H 2023 saw 40% of equity investors pick up pace relative to 1H 2022.

In 1H 2022, only 19% of equity investors were more active relative to 1H 2021 (of course 1H 2021 was nuts)

Now

12 Months Ago

Investing Activity - All surveyed debt capital providers

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Now

12 Months Ago

While a significant portion (40%) of lenders are more active YoY, we see a material shift to less activity from where it was 12 months ago comping YTD YoY (35% less active compared to 13% 12 months ago)

Investing Activity - Equity and debt over next 12 months

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Equity

Debt

Both and equity are debt are itching to deploy capital! But will it actually manifest? We received pretty much the same results 12 months ago, but the activity didn’t quite hold up to the expectation.

Investing Activity - Equity capital providers by stage

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While Seed/A investors picked up their pace, ~50% of Series A/B/Growth investors were less active 1H 2023 vs. 1H 2022. ~2/3^rd of all surveyed equity investors expect more investing activity over the next 12 months.

Investment Activity - Debt capital providers by type

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Unsurprisingly, non-bank lenders have picked up their pace and intend to keep doing so. Bank lending receded for obvious reasons in 1H2023 and has stabilized with a floor to grow from (at more reasonable levels).

Anticipated Bridge Financing Needs

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~80% of capital providers think less than 25% of their portfolio will need a bridge, same as 12 months ago

Now

12 Months Ago

Anticipated Bridge Financing Needs

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The vast majority of any bridging still needs to come from existing equity investors. There’s been a material decrease in expectations for new equity investors to play a role. ~1/3^rd expect lenders (existing or new) to

Now

12 Months Ago

Strategy Shifts

Please provide a short statement about any shifts in strategy you're making

Seed/A Equity Investors - Some Strategy Shift

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• ~55% conveyed at least some shift in strategy, saying:
• “Sharpening our pencil on what it takes to get to A and making sure our companies have the runway and plan to clear that bar. Otherwise, don't plan to slow down.”
• “Being more deliberate with selection and timing of deals, so that we can allow the very best deals at the very best terms get on our radar screen.”
• “We are employing lower valuations and more structure to mitigate any risks we see in companies.”
• “Participating in rounds for companies that are later stage than we normally do, but could use a small bridge because their current investors have limited reserve capital from previous funds.”
• “Willing to accept lower growth rates for new investments. Looking for more ownership.”
• “We saw this coming starting in Q3 of last year. We already shifted allocations and have been helping portfolio companies raise "bridge" rounds (though I would never say bridge).”

Seed/A Equity Investors - No Strategy Shift

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• ~45% said no shift in strategy, but added:
• “No shifts in strategy, would like to deploy but few opportunities.”
• “We continue to invest vigorously as per normal. We are just getting companies with better traction at a lower valuation.”
• “We are remaining disciplined. The market has come to us. We are seeing better valuations and more traction/ signals of PMF.”
• “Continue to focus on market differentiation and excellent management teams within our investment mandate.”
• “This isn't a strategy shift, but we're hopeful to see an increase in accretive bolt-on M&A opportunities at attractive prices.”

A/B/Growth Equity Investors

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• No material shifts in strategy, simply looking for more durable quality:
• “Targeting scaled, high-to-steady growth, high retention B2B SaaS.”
• “Good assets are still expensive and won’t transact unless they get a premium, so will need to pay up.”
• “Bar is higher, risk appetite is lower.”
• “More buyout focused.”
• “Balancing tension between less competition for CF negative companies with “risk off” time in market - bar is high.”

Lenders

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• No material shifts in strategy, but not much interest in funding burn:
• “Focusing on more scaled businesses with proven control over opex, or excess liquidity that will last them ~24 months.”
• “Looking for companies that can get to CFBE with our capital as opposed to another equity round.”
• We anticipate a shortening in credit to match smaller equity rounds and round extensions, returning to pre-COVID level debt terms. Companies demonstrating strong, efficient growth will still attract 'pre-banking crisis' debt terms.”
• “Banks are not looking for companies who will be large borrowers and utilize large amounts of debt. Banks are in capital preservation mode. They want deposits.”

If you’d like to discuss, collaborate or just catch up, reach out

Brian Parks

bparks@bigfootcap.com

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