A potential extinction event may be looming for early-stage startups, as the first quarter saw a significant decline in venture capital funding by over 50%, raising concerns. Recent data from PitchBook, a research firm, and the National Venture Capital Association reveals that startups managed to secure only $37 billion from VCs, the lowest amount in the past three years.
In the first quarter, venture capitalists decreased the size of their checks to startups, resulting in the lowest number of deals in five years. According to Kyle Stanford, a VC analyst at PitchBook, the market is displaying a cautious approach towards investment. He also warned that companies may face difficulties in raising capital, even if they are growing at a rate they established in their last funding round.
Prior to the collapse of Silicon Valley Bank, early and mid-stage startups were already at a higher risk of facing cash crunches due to the Federal Reserve’s aggressive interest rate hiking cycle. The demise of SVB resulted in further severed funding pipelines for startups.
We have been highlighting for several months the decline in VC funding and the potential challenges that startups could face as a result. Various headlines have warned about the consequences:
- “Fundraising by Venture-Capital Firms Tumbles to Near Decade Low Amid ‘Tech-Wreck'”
- “VC Funds See ‘Mass Extinction Event’ for Startups in 2023: ‘It Will Make the Financial Crisis Look Quaint'”
Even the popular platform Substack encountered funding difficulties and resorted to asking its users for support:
- “Substack Asks Writers for Money as VC Funding Freezes”.
Stanford from PitchBook cautioned that the substantial decline in VC funding could soon impact later-stage startups and mature companies in the latter half of this year, including those that have been downsizing and implementing cost-cutting measures. “Companies are trying to extend their runway,” he stated, noting that VCs may not be able to support all early-stage startups that burn through their cash.
This situation implies that a wave of startups may be on the verge of shutting down. Andrea Lamari, the general partner at Manhattan Venture Partners, remarked that there has not been this level of uncertainty regarding the impact of the macro environment on startups in nearly a decade. She also warned that it seems as if everyone is waiting for the other shoe to drop.