Hopping into 2023 Dealmaking

Nicole Paterno takes a deep dive into what we can expect in funding this year.

Economists, analysts, and investors themselves are heaving a sigh of relief as the markets exit 2022 bidding the year, “Good riddance!”

Understandably, the world’s stock markets were not spared from the shocks of the war in Ukraine (resulting in a gas, petroleum and energy crisis), China’s (the world’s second largest economy) strict COVID zero policies, and (one of the words we can attribute to year 2022) inflation. It was really BRUTAL. Major averages — S&P 500, Nasdaq, and the Dow — were victims of what is termed as “The Great Inflation.”

I extracted and took the liberty of arranging in chronological order a list of historical worldwide distresses from Ben Carlson’s blog “A Wealth of Common Sense.”

(And, as a side note from Fortune: bear markets usually signal a slowdown in the economy, which may make consumers less likely to spend and, in turn, lower the GDP. In a bull market, companies tend to generate more revenue, and as the economy grows, consumers are more likely to spend.)

With the exception of the energy industry, no one was spared: Tesla, Meta, Apple, Amazon, Microsoft, and Bitcoin were all knocked down.

Ben Carlson muses, “I try to look at losses like this as sunk costs. They already happened. You can’t go back and change things now. All that matters is what happens from here, not what happened in the past.”

Investment officers and strategists foresee a choppy start to 2023 with 2022 headwinds (hopefully mild ones) lasting until June. By the second half of the year, the market thesis is that rebounds will happen. This comeback is what economists, investment banks, and hedge funders are all looking forward to.

Global VC funding experienced a pullback in 2022 compared to 2021.

According to Alan Wink of EisnerAmper, “Q3 2022 saw only 4,074 completed deals and invested capital of $43 billion across all stages.

The deal count was the lowest quarter since Q4 2020 and continues a string of three quarters of declining deal numbers. The dollars invested in Q3 2022 were the lowest amount of deployed capital over the last nine quarters.

For the first three quarters of 2022, there have been 11,871 VC deals completed with almost $195 billion invested — a far cry from the 17,867 completed deals and $344 billion of invested capital in 2021.”

Moving geographically closer to home, as China begins to lift its restrictions and open its borders, its exposure remains reduced for attracting funds this 2023. This means that neighboring India and Southeast Asia can stand to benefit from capital flows.

Economists see the recession not abating until 2024. VCs (venture capital) and PE (private equity) firms are all stocking up on dry powder. A major takeaway from 2022 for investors is that due diligence and reassessing business fundamentals should be prioritized over FOMO.

The same can be said for angel and seed stage deals (screenshot courtesy of CrunchBase.)

Nevertheless, 2022 is considered a record year for angel investing quoting my favorite go-to resource CB Insights.

According to them, angel investing groups participated in 1,361 angel or seed-stage deals worth a combined $2.9 billion, building on 2021’s record of 1,252 deals.

Individual angel investors, on the other hand, participated in 4,679 angel or seed deals worth a combined $36.2 billion, building on 2021’s 4,422 deal record. Even with the worldwide VC slump, angels powered on.

Moving on to impact investing, Global Impact Investing Network (GIIN) released a market study in October 2022 headlining that over 3,349 organizations currently manage USD1.164 trillion in impact investing AUM (assets under management) worldwide.

The research indicates that impact investing is growing globally, and is well-positioned to build on its current momentum in the coming years.

Most of the respondents came from developed markets with 50% from US and Canada (with a 37% of impact AUM) followed by Western, Southern, and Northern Europe at 31% participation (but with 55% of impact AUM.)

Emerging markets frequently comprised sub-Saharan Africa at 6% (2% of impact AUM), Latin America & Caribbean at 3% (1% of impact AUM), and Southeast Asia at 2% (1% impact of AUM.)

Per GIIN, fund managers accounted for the majority of the sample with some development finance institutions (DFIs), non-corporate foundations, diversified financial institutions, and family offices.

The report also states that the areas of market growth for impact investing in 2023 are in green bonds and in corporate impact investing.

To validate this, Private Equity International and BNP Paribas Asset Management maintain that climate continues to be the most prominent impact theme. 2023 is predicted to be the year for climate tech startups and impact ventures to shine.

Alongside climate (such as virtual power plants as part of renewable energy efforts,) other impact and social flavors are healthcare (I would include femtech here), biotechnology dealing with materials research for upcycling and producing more biodegradable items, and regenerative agriculture to name a couple. I encourage you to check CB Insights 2023 trends report.

What does this mean for us here at Impact Pioneers Network?

We are entering 2023 refreshed, possessing a renewed sense of purpose, and with clarity.

Significant time was spent by the IPN team last November 2022 carving out an investment pathway between Villgro Philippines’ incubation and accelerator programs as feeders to Impact Pioneers’ deal pipeline. Moreover, we reflected and strategized on operationalizing the values that go together with the brand we set ourselves to build.

We still focus on agriculture, climate, health, education and gender. And these are what make us stand out.

For developing more impact investors and impact angels, and making available and accessible diverse, blended funding instruments for impact entrepreneurs, we see room for disruption (and I mean this in a good way) and much, much growth in accepting particular directions and approaches to seed and early stage investing.

The VC landscape is being disrupted, and it has been going on for the past 3 years or so. The same treatment can be done towards angel investing and impact investing.

Having said that, do look forward to my succeeding blogs (together with my fellow IPN conspirators Priya and Greg) in moving forward angel investing and impact investing in the Philippines.

Truly exciting times.

About the Author

Nicole Paterno, Program Manager at Villgro Philippines leads Impact Pioneers Network— a first-of-its-kind angel investing network to catalyze local capital and back high-potential Philippine enterprises through customized incubation, technical assistance, and investment readiness to prepare to raise capital. The Impact Pioneers Network is jointly designed, developed, and managed by Villgro Philippines and xchange.

Connect with Nicole at nicole.paterno@villgrophilippines.org