There are more than 50,000 US VC-backed startups, and many will be looking for capital soon.
Many startups raised money in early 2022, and the average time between fundraising is 1.5 years.
Some startups will be looking for funding in Q4 or be forced to look for a sale or shut down.
Don't let the sudden reopening of the IPO market distract you – startups are still dying left and right.
They're shutting down, looking for buyers, or begging for an investor to write them a check to get to the end of the year, if that.
My colleagues Melia Russell and Rob Price recently wrote about one of the latest victims — lending company Captain. The startup has followed the typical survival strategy of a desperate startup this year by first cutting costs with layoffs. Then searching for more capital with fundraising or some kind of financing or debt. And when that failed, looking for a buyer. Captain, however, has not decided to shut down – yet.
Recur, an NFT startup once valued at more than $300 million, decided to shut down recently. And a tiny edtech Web3 startup called 101 also called it quits.
There's no need to get into why this is the case for so many startups trying to stay afloat. We all know venture capital funding is tough to come by these days. It's cratered to levels not seen since before 2020. And there are now more than 50,000 venture-backed companies in the US – a figure that's doubled since 2016 – that are at risk of "high capital shortage," PitchBook notes in its second-quarter "Venture Monitor" report.
"The US VC market is now operating through five consecutive quarters of less capital making it to the market than is estimated to be demanded," wrote PitchBook analyst Kyle Stanford in a recent note titled "Accounting for the Overcapitalization of VC." "The past two quarters of this deficit were more severe than the most overcapitalized quarter in 2021."
So let's peel back the curtain a bit.
Venture capital funding was overly abundant in the latter half of 2020 and all of 2021. There were nearly 19,000 deals done that year, according to PitchBook, until things started to taper off in 2022.
Stanford points out that the average time between funding rounds is now around 1.5 years. – basically what it was before the pandemic boom times. So, hypothetically, if a company last raised capital in the first quarter of 2022 (one of the most active in terms of deal count, PitchBook data shows), many startups will be on the hunt for new capital in the fourth quarter of 2023.
Every company's situation is a little different based on their operating expenses and whether they've gotten fresh funding already. Though, unless you're an AI startup, the chance of a VC check has been slim to none. So what are their options? Likely a sale or shutting down.
But it's not just VCs who are being stingy. All those crossover firms that wanted to get in on the action like Tiger Global (which by the way, did 335 deals in 2021, according to Crunchbase) and Coatue, aren't doing the kind of deals that they used to. Participation has dropped from more than 550 deals and a quarterly peak of nearly $50 billion in 2021 to fewer than 200 deals and a quarterly peak of around $15 billion in 2023, Stanford wrote.
"We believe that a large portion of the supply-side deficit is derived from the crossover and other nontraditional investors that have pulled back from VC to more traditional strategies," he wrote.
Startups are likely going to clamor for VCs attention in the coming months as those cash runways continue to dwindle. As IVP's Tom Loverro so presciently pointed out back in January: Late 2023 and 2024 for startups will make the 2008 financial crisis "look quaint for startups."
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