Is the age of free money over?

The answer is probably yes.

In recent years, 'free' money has been abundant in the market due to unique microeconomic conditions. But the tides are turning with markets becoming unstable, inflation rising, and central banks attempting to stamp out this inflation. Meanwhile, companies that have ridden the wave and enjoyed the perks of inflated valuations and seemingly endless 'free' money will soon have to grapple with the consequences of the current economic climate. 

It's not all bad, especially if you're an early-stage company or considering starting your entrepreneurial journey.

After the global financial crisis in 2008, central banks began pumping liquidity back into the market to alleviate the impacts. We've seen this again in the last two years as world governments rally from the 2020 COVID-19-induced market decline. It has, in essence, meant that since 2008 there have been large pools of 'free' money available for investment. 

For many entrepreneurs, they've only ever operated in this age of 'free' money. But it's become clear this age is over. 

Central banks are attempting to stamp out the current rising inflation by pushing up interest rates to resettle the markets. This is the first time they've done this since the global financial crisis. Venture capitalists will start finding it much harder to raise money, and as a result, the growth of emerging economies may suffer.

A typical start-up has stages when it comes to investment; pre-seed, angel investors and venture capitalists coming in for Series A, and so on if a company has the legs for it. Historically in New Zealand, there has been a gap in the venture capitalist space. In recent years the government intervened with NZ Grow Capital Partners, which has put in funding to help seed several venture capital players in NZ to get money coming in for Series A. 

At the same time, we've had overseas venture capital industries becoming more active, causing almost an oversupply of series A type funding in NZ. While seemingly a positive thing, the main consequence of this oversupply is the displacement of investment. Venture capital funds have started investing in start-ups earlier than the norm to secure deals, coming into a territory typically held by angel investors. 
This was the picture up until late 2021. Since then, the significant shocks throughout the market have caused further disruption, and a recession seems more and more likely.

Inevitably, many companies will eventually feel the pinch of the changing tides of the markets, but how hard they fall depends on if the economy manages a soft landing or a crash landing. There is uncertainty around how things will play out, and much will depend on central banks and their ability to navigate the choppy waters whilst avoiding a repeat of the 1970s stagnation with inflation.
However, data from PitchBook suggests there is a lot of dry powder in the market.
While many institutional investors aren't as keen on putting money into VCs, that money will still be invested. We have record dry powder with the last Angel Association Summit suggesting the amount of money looking to be invested in the New Zealand ecosystem is north of a billion dollars – the highest it's ever been.

Sprout saw huge excitement at a recent Showcase from early-stage investors in the businesses involved in one of our Accelerator Cohorts. However, the uncertainty was undoubtedly still there, and entrepreneurs are advised to save a bit of cash and give themselves some flexibility as the future unfolds.

Arguably, it's a good time to start a business.
Starting a business at the bottom of the wave, so to speak, to ride it to the top. While start-ups won't be unaffected by a recession, the impact will likely be lessened by NZ's current situation. It's not unreasonable to expect good companies with a solid offering to be able to raise money for their next round of investments and gear up to build commercial products in new markets in the coming years as the markets stabilise and investors find their footing again.

As COVID-19 and the war between Ukraine and Russia have demonstrated, our global food systems are broken. Agtech is needed now more than ever, along with behaviour changes, to fix the fundamental problems in this space, making start-up agtech the place to be and a safer bet for investors.

While the future looks uncertain and will be tricky to navigate, it solidifies the importance of creating a team and bringing on investors who will walk you through the challenges that lay ahead, not just throw money at the situation.
When looking at companies to invest in, Sprout is looking for entrepreneurial talent, people who have unique ideas, are visionary, driven, passionate, and coachable. We're looking for founders who value our capital and our connections and capabilities, which ultimately supports the establishment, growth and success of a business and the people who run it.

Want to partner with Sprout for your Investment needs? Find out how we can help.