A limit to growth? Tech’s Malthusian check

The term ‘Malthusian Check’ was coined in the 18th century by Thomas Malthus, a British economist and demographer to refer to a population growth constraint, essentially caused by a lack of available resources needed for survival. This has got me thinking… with venture capital drying up, are we witnessing a Malthusian check in the tech sector, which is set to impact the next few years of startup and scaleup population growth?

It’s no secret that dealmaking in the private sector seems to be facing a significant downturn. A number of influential people in the sector, from founders to investors, have taken to LinkedIn, Medium and even the broadsheets to speak about how dire the situation really is, compounded by a continued increase in the cost of capital and economic uncertainty.

Crunching the numbers

Our clever friends at Pitchbook - a well known Venture Capital (VC), Private Equity(PE) and Mergers and Acquisitions (M&A) database - have run the numbers, and the results show a staggering sixty percent decline in the value of VC deals compared to the previous year.

A silver lining is that the volume of deals remains relatively steady, especially amongst early-stage companies. However, capital inflow is some way off reaching the investment levels seen over the past few years. Companies that are successfully raising capital, are generally raising less, at often lower valuations too. Pitchbook’s conclusion in their report is simple: no one is exempt from these challenges.

In 2021, the value of VC deals surged by 102%, from £13.7 billion in 2020 to £27.7 billion. In 2022, it remained strong at £29 billion. However, this year, it has dwindled to a mere £7.9 billion, a 71.5% reduction.

Whilst there was a slight increase in capital invested in Q2, I fear this trend is going to cause a terrible hangover for the sector, though perhaps it is too soon to draw strong conclusions.

When funds and investors raise capital, they tend to deploy that capital over a three to five year investment cycle. So, reduced fundraising this year will have a direct and inevitable impact on the amount of capital flowing into companies in the near future. The challenging fundraising landscape that we find ourselves in, is set to stay for the foreseeable.

Company lifecycles

Exit opportunities will be a concern for investors. Not just private M&A, but Initial Public Offerings (IPOs) too. Public listings are pretty scarce at the moment - only two VC-backed listings occurred in H1 of 2023, with all of the top five exits being through acquisition. Companies are desperately waiting for vital reforms in the London Stock Exchange’s regulations to make public listing a more attractive, and less burdensome, proposition.

The UK has some reputational damage to overcome in this space to ensure we don’t lose our most successful startups to foreign public markets. This is absolutely front-of-mind with British chip maker Arm’s impending US IPO, with a valuation of $52bn. This will make it the largest IPO of the year.

The health of the UK IPO pipeline is a strong indicator of underlying health in the privately held technology sector. Despite the UK still boasting a vibrant tech ecosystem, the FTSE 100 only officially includes two tech companies: Sage and Autotrader.

The future for startups

So, where does the Malthusian Check fit in here? Well, if we were to see these changes as a correction, then perhaps it's no bad thing that poorly performing businesses are weeded out.

There is light on the horizon for founders, however, as there are still VC’s out there actively investing after the obligatory summer break. Take our clients, Concentric, who are looking to invest in ambitious technology companies from pre-seed, through to seed and follow-on rounds, as well as Northzone, a global technology investment partnership VC firm.

The tragedy is that some perfectly viable companies, entrepreneurs and lightbulb ideas may well not be able to access the necessary capital for launch or survival. I hope it won’t put off the future generation of university leavers and those thinking of going out into the startup world. They’ll need to be braver than ever.