Victor Basta is the founder of the boutique investment firm Magister Advisors.
More posts by this contributor
- Unicorns: A tale of two continents
- Venture investing in the US and Europe are totally different industries
Amid record amounts of capital raised by VCs worldwide, and a sharp rise in the number of private “unicorns” valued at $1 billion-plus, there has been a quiet, barely noticed implosion in early-stage VC activity worldwide.
The chart below is dramatic, and accurate. Since 2014, the number of VC rounds in technology companies worldwide has nearly halved, from 19,000 to 10,000, according to PitchBook. During that time, the drop in VC funding amount has been nowhere near as dramatic, highlighting that VCs are concentrating investment into fewer later-stage companies.
This is now a three-year trend, so cannot be “blamed” on macro or short-term factors. More worryingly, it comes at a time of unprecedented stock market valuations worldwide.
Global VC financing volume and value in technology companies
This amounts to a crash in number of financings, and is the most extreme since 2001.
The crash has occurred in early-stage funding
The data shows by far the sharpest fall in activity has been in early- and seed-stage rounds. In fact, later rounds have remained fairly flat the last three years, and A and B rounds have fallen, but not nearly by as much.
Global financing volume into technology companies by stage
The early-stage implosion is global
The fall in financings has happened literally everywhere:
What caused this quiet implosion?
- The era of funding apps is over –VC funding rounds grew dramatically after 2010 partly because of rebounding economic activity, but mainly in order to back a raft of B2C apps taking advantage of consumers’ emerging mobile-first behavior. With Android and iOS ecosystems well established, nearly every commercial segment saw a raft of new digital challengers, in everything from lifestyle to health, finance and a raft of special interest categories. Since 2014, early-stage funding for businesses with “mobile” in their description has fallen off a cliff.
- SaaS funding has dropped sharply –In 2014, nearly 5,000 rounds backed companies describing themselves as “SaaS.” This year, that figure is down nearly 40 percent, to about 3,000. With so many SaaS companies having been created in the past 10 years, it’s hard to justify, let alone back, new SaaS startups, which are by now competing against established SaaS players, not legacy perpetual license vendors.
Global financings (value and volume) in SaaS
- Even fintech has seen a quiet fall in activity –While nowhere near as dramatic as the fall-off in SaaS and mobile funding, fintech funding activity has dropped nearly 10 percent since 2014. Again, we believe this marks a natural maturation of many fintech segments, where winners have already emerged well-capitalized and new entrants in many fintech categories are fighting a costly uphill battle to grow quickly.
- In general, VCs are doubling down on “winner take all” leaders –Since 2014, aggregate funding into late-stage rounds has hovered around $55 billion a year, though it will be somewhat lower this year. Today’s $1 billion private financing round was unheard of a decade ago.Recent $1 billion raisers Airbnb, Spotify, WeWork and Lyft have joined previous billionaire raisers, including Uber, Facebook, SpaceX and Flipkart, and point to a strong trend to concentrate “winner take all” funding into companies that have real potential to lead or dominate their segment.
Overall we believe 2012-16 was a bubble in early-stage funding driven by the fundamental platform shift to mobile. In easy hindsight, too many companies raised “concept” money, and an unprecedented number failed early and “failed fast.” The VC market for seed and early-stage failed with them, falling to half its size in three short years.
Arguably, post implosion, early-stage VCs have become more “rational” and we are unlikely to see the “spray and pray” approach that dominated a few short years ago. However, in absolute numbers, it also means there is far less capital available to early-stage companies today than a few years ago, and inevitably there will be a continued drop in the number of new startups, which cannot now rely on getting the first round raised easily in the current environment.
Whether the early-stage VC implosion is healthy or disastrous for the tech ecosystem remains to be seen.
Likely it will be a bit of both.
FAQs
If the startup fails, they will not only lose their original investment but also any potential returns that they might have earned had the startup been successful. If the venture capitalists are unable to recoup their investment, they will be forced to write off their losses as bad debt.
Is VC funding drying up? ›
October's investment total marks the acceleration of the trend: VC funding has gradually tapered off since the record year of 2021, and some investors have warned of a possible "mass-extinction event." Down rounds, often loathed by VCs and startups alike, have become far more commonplace than usual.
What is considered early stage in venture capital? ›
Early-stage companies typically have a prototype or a service model that's been tested and have developed a business plan to grow the business. The company may even be generating early-stage revenue. It's not common to be profitable at this stage but some businesses may be breaking even.
Why is VC funding slowing down? ›
“Why has there been such a sustained slowdown? At the core of the issue is exits,” Kaidi Gao, a venture capital analyst at PitchBook, told FT. “Unless we see meaningful improvements from the exit market, we're expecting fundraising difficulties to linger, and that will put downward pressure on deal-making.”
What happens when a VC fund closes? ›
Definition: The final close occurs when the VC firm has reached its target fund size or decides to close the fund, even if it falls short of the target. Purpose: At the final close, fundraising efforts officially conclude, and the VC firm has a clear picture of the total committed capital available for investments.
What percent of VC funded startups fail? ›
The average venture capital firm receives more than 1,000 proposals per year. Approximately 30% of startups with venture backing end up failing. Around 75% of all fintech startups crash within two decades. Startups in the technology industry have the highest failure rate in the United States.
What is the outlook for VC funding in 2024? ›
Following a turbulent 2023, Pitchbook makes several positive projections for 2024: Positive economic signals in 2023 indicate a comeback in IPOs in 2024. U.S. VC fundraising is expected to increase, making it stronger than 2023 and comparable with 2020 figures.
How many VC funds fail? ›
And yet, despite all that cash flowing into VC-backed companies, twenty-five to thirty percent of them will fail. One in five fail by the end of their first year; only thirty percent will survive more than ten years.
Are VC funds risky? ›
Venture capital is a high-risk, high-reward type of investment, and there is no guarantee of success. While VC firms aim to identify the best opportunities and minimize risk, investing in startups and early-stage companies is inherently risky, and there is always the potential for loss of capital.
What are the problems with early stage ventures? ›
Lack of funding: Many early stage ventures are underfunded, which can lead to cash flow problems and a lack of resources. 3. Lack of customers: Without customers, a business cannot survive. Early stage ventures often have difficulty attracting customers, due to a lack of awareness of their product or service.
Venture capitalists make money from the carried interest of their investments, as well as management fees. Most VC firms collect about 20% of the profits from the private equity fund, while the rest goes to their limited partners. General partners may also collect an additional 2% fee.
Why invest in early stage venture? ›
In addition to the potential for significant returns, investors can be attracted to startup investing as part of a portfolio diversification strategy. By supporting a company in its earliest stages, investors can also potentially share their knowledge and expertise, striving to further their chances of success.
Has VC funding dried up? ›
Fundraising at Lowest Level Since 2017
In fact, 2023 was the worst year for VC fundraising since 2017, when 662 funds raised only $46.8 billion. Without exit activity and the return of capital to limited partners, fundraising will continue to suffer.
How long do VC firms last? ›
Most venture funds have a 10 year time horizon to invest all of their capital and then return the profits to the fund's investors. There are exceptions to this 10 year life cycle, but that is fairly standard.
What happens to investors' money if a startup fails? ›
Investors form a partnership with the startups they choose to invest in – if the company turns a profit, investors make returns proportionate to their amount of equity in the startup; if the startup fails, the investors lose the money they've invested.
Do investors get their money back if the business fails? ›
In that instance, whatever cash is in the business following the sale of assets and the payment of any liabilities the business may have, proceeds will be divided amongst the shareholders on a pro-rata basis. In most instances when a business fails, investors lose all of their money.
What happens to founders when startups fail? ›
Of course, not every founder of a sloppily shuttered startup will find themselves in the sights of law enforcement, like Oltyan did, but they could face a series of serious issues ranging from liability for unpaid debts to claims from former employees and vendors.
Why do startups fail even after substantial funding? ›
Lack of market need: One of the most common reasons startups fail is that they create a product or service for that there is simply no market demand. This means that even if the product or service is of high quality and has a good business model, there may not be enough customers to sustain the business.
