Five Questions Startup Investors Must Answer In 2022

Despite all the disruptions of 2021, it was a good year for startup investors. A recovering economy, booming tech sector, endless dealmaking, and lots of investment capital fueled plenty of investing opportunities despite the pandemic’s continuing impacts. Just as importantly, there’s still plenty of room for optimism heading into 2022, despite all of January’s stock-market mayhem.

That market mayhem, combined with several maturing technology trends, a winter Covid resurgence, tougher regulatory oversight, the Great Resignation, and other changes will require new strategies for success in 2022, though. It won’t be enough to throw a wad of cash at a decent idea and walk away, expecting later investors to cover up any mistakes with late-arriving “dumb” money. Here are my thoughts on five big questions that will shape where I’m putting my money in the new year:

1) Address the war on talent with good salaries

Compensation and retention are already gigantic headaches for companies, whether they’re startups or Fortune 500 giants. I’m just glad I’m not a CEO anymore. Even my board meetings these days are consumed by conversations over wage pressures and staffing retention/hiring. One hard-charging employee at one of my companies started there two years ago, making $45,000 a year. This year, he wanted $90,000, before they settled on $85,000. Another firm had to elevate starting pay for no-experience engineers from $55,000 to $70,000 in just a year. How startups get and keep talented employees will challenge every company.

But remember, other than those relatively few who only chase the highest pay, most people define a good job more broadly. A good work environment, career path, strong managers and team, and a higher purpose for the work all matter too. More flexibility on Work From Home issues is increasingly crucial, too. Building a more emotionally meaningful and rewarding workplace can reduce the need for stratospheric pay hikes, and stabilize a company amid all the uncertainty. How are your companies building better workplaces, and what can you do to encourage it?

2) Create an investment cushion

I always encourage my companies to only take the investment capital they actually need to grow and invest in product and customer experience. That’s still important. But this year, consider building in a funding cushion beyond your immediate needs. The shifting economy, and what’s likely to be a far tougher atmosphere to raise money will make fundraising a lot more difficult. But it’s also important to look at how your companies are spending the money they do raise. Do they need that $200,000-a-year executive? Will those three extra engineers really change the project’s path to the product? Investment capital isn’t free money; with a reckoning clearly on the way for pre-revenue companies, and accessing new capital more difficult, it’s time to adapt. How are your companies planning, raising funds, and using their funds?

3) Fintech is becoming mainstream

The hype and hyper-speculation in 2021 around blockchain, cryptocurrency, Web3, DAOs, and non-fungible tokens is maturing in 2022 into real businesses and business processes that overturn established relationships and ecosystems, while potentially democratizing ownership and investment. How do those fintech shifts change the way your companies operate, even in more traditional sectors and with more traditional customers?

4) Opportunities in the metaverse for fintechs

After years of hype, the augmented reality/virtual reality space is finally maturing, with Facebook’s Meta-pivot, expected headsets from Apple and Microsoft, the Roblox explosion, and more all underway. And it’s not just VR/AR/MR/XR. We’re approaching pivot points in several other long-simmering sectors, including 5G, cloud computing, robotics, increased processing power, genetic engineering, solar energy and artificial intelligence. Those trends have all been cooking for years, but are approaching widespread integration into everyday business and life, and creating real value. How are the businesses you invest in leveraging these maturing, transformational technologies?

5) Exits may be more difficult in 2022

This is bad news for investors hoping to turn their money around for new opportunities. While 2021 saw more than 800 mergers & acquisitions in media and telecommunications alone, up 27% from 2020 and collectively worth a record $233bn, according to PWC, 2022 is looking increasingly difficult. The Federal Trade Commission and U.S. Department of Justice (never mind the European Union and the UK) are signaling much tougher enforcement of antitrust regulations. They’re even trying to unwind some long-approved deals.

At a minimum, regulatory approvals will take longer and undergo much more scrutiny, increasing uncertainty and delaying payouts. In a related fashion, the SPAC gold rush is petering out. Going public by way of Special Purpose Acquisition Companies has gone out of fashion almost as quickly as it became popular. Skeptical regulators are clamping down here, too. Even worse, investors are getting far choosier about whether they’ll join a SPAC, or keep their money in it once a merger candidate is identified. The poor market performance of many SPACs post-merger will only make this option less attractive. For those SPAC dealmakers still in the game, they’ll need to be far more careful in their marriage proposals. How are your deals structured for the realities of slower, and fewer, exits?

It could be another great year of startup investing, one I’m looking forward to with excitement. But it’s going to be a very different environment in many ways, from the changing pandemic response to fintech and other maturing technologies to new fiscal and regulatory environments. Don’t count on the playbook that worked last year to be the one that works going forward.