Startups are hoping for a turnaround in funding
Many startups have had a pretty tough time raising money to do their startup thing these past couple years. In July, according to S&P Global Market Intelligence, the value of private equity and venture capital-backed funding rounds was down about 7% month to month.
Some startups are hoping for a turnaround, but the evidence is mixed.
“It’s a tale of two cities,” said Kyle Lui, general partner at venture capital firm Bling Capital. “If you’re a startup that is capital-efficient, that’s growing, that’s in a market that VCs find attractive — for example, AI over the past 18 months — you are getting multiple offers to invest at any stage of the company.”
If, on the other hand, you are not in that category, “it’s incredibly difficult.”
For companies in the earliest stages of development, just getting their start, there is money. More such startups were funded, and got more funding, in the second quarter than since the beginning of 2022, according to PitchBook.
But for startups overall, prospects are dimmer, and the evidence of a turnaround is “mixed at best,” according to Dylan Thomas, reporter with S&P Global Market Intelligence. “If you look back through the first half of the year, both the value and the number of venture capital funding rounds were lower than they had been the year prior, in 2023,” said Thomas.
Only a few years ago, things were very different.
Shyam Srinivasan is CEO Zitara, a startup that makes software designed to most efficiently use power from batteries that are running low. “Our software is in everything from e-bikes to giant grid-scale batteries to expand your range on a particular drive or increase the energy availability for trading,” he explained.
Between 2019 and 2022, Zitara raised $20 million. In those early COVID-recovery years, there was a feeding frenzy of investment in startups generally. People were “throwing capital at us left and right,” Srinivasan said.
Interest rates were basically zero, so investors were looking for ways to make money, and they watched a record number of startups and other companies go public, making lots of money for their early backers. In 2019, 232 companies went public; in 2020, 480; and 2021, more than 1,000.
“There was a lot of FOMO — fear of missing out — on these returns,” said Kyle Stanford, a lead venture capital analyst at PitchBook. So investors poured into startups, making big bets. But as time went on, “a lot of the 2021 tech IPOs did not make public investors money,” Lui said. “Eighty-four percent of the IPOs from 2021 are still underwater.”
The number of IPOs tanked, falling to 181 in 2022.
Now there is a lot of money sitting in startup shares that investors paid a lot for, with no way out. “And so I think institutional investors are a little hesitant to invest in this next crop of companies,” Lui said. Hesitant and very picky. “There’s been a massive flight to quality,” he said.
Srinivasan, the CEO of Zitara, has benefited from that flight and is raising another $17 million. There’s interest — AI and batteries are still hot topics — but he said things are different.
“Even with it going well, the investors we were talking to were simply comparing us with a higher volume of deals,” Srinivasan said, and so the process is moving slower.
There are now more than 55,000 venture-backed startups, about double the number in 2017, according to PitchBook, and they’re all fighting for customers and growth within their respective industries, and for limited investor money.
“And so, so many companies raised money, so many companies went out and built sometimes great products and earned real revenue over the last couple of years, and so even with all of us doing well, it feels like we’re in line for a mass-scale extinction event,” Srinivasan said.
Startup software provider Carta reported that more startups closed in the first quarter of this year than in any quarter in the past decade.
Help may come from the Federal Reserve, if it cuts interest rates as expected.
“There is a relationship to venture funding and interest rates,” said Steve Kaplan, professor of entrepreneurship and finance at Chicago’s Booth School of Business. He points to recent research showing that for every percentage point rise in interest rates, venture capital funding for startups falls by 25%. Conversely, if interest rates in the economy in general are lower, startups, while risky, look more enticing as a way to make money.
“On the other hand, the headwind is the exits,” Kaplan said.
The exits. The IPOs. The buyouts. These are how all the money stuck in earlier investments comes out to be invested again. They are the pot of gold at the end of the startup rainbow that got so many investors to invest in the first place. The same pot of gold that has not shown up much the past few years.
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