It’s no secret that the startup funding environment has inverted during the past 24 months. Following the Covid software boom when venture funding flowed and valuations reached the stratosphere, investors are now more reserved and valuations are more sober. Call it a buyers market for startup equity.
But what does that mean for startups who have to work harder to get funded? That question applies to all funding stages, including later ones, when down rounds are rampant and “flat is the new up.” This puts a squeeze on startups, many of which reach the end of their runway or do layoffs to reduce burn.
To wrap some numbers around this, Circumference Group’s Luca Sechi tells Localogy Insider that the number of well-funded startups ($10 million+) that shut their doors in 2021 and 2022 were 33 and 47 respectively. In 2023, that figure jumped to 122 and is on pace for similar dismal results in FY 2024.
Course Correct
Sechi also tells us that aggregate VC funding per quarter was $40 billion in 2022 and 2023. This compares with $100 billion in 2020 and 2021, signaling a supply-constrained market for funding that has shifted the power balance to VCs. Time between rounds has also gone from 10 months to 22 months.
That brings us back to burn-rate issues that compel layoffs and cost-cutting to extend the runway closer to 22 months. Those who got caught at the beginning stages of this trend had to quickly adjust their burn rates… while companies born into this environment are likely leaner… and using AI to automate.
Speaking of AI, Sechi reports that AI product companies get the lion’s share of the above funds. But importantly, this includes companies with deep AI tech and defensibility. Filling a pitch deck with the word AI, or building a light UX layer on top of GPT, doesn’t cut it in this stringent environment.
Using that definition, AI companies are raising $65 million per round, compared to $38 million for non-AI companies. Multiples for AI companies in B and C rounds are meanwhile 88x compared to 29x for non-AI. and B & C round ARR growth rates for AI companies are 464 percent versus 197 percent for non-AI.
Silver Lining
So what’s the silver lining if you aren’t an AI company? History indicates that we may be near the bottom. The dot com bubble saw 10 quarters of depressed funding before a rebound occurred. It was 9 quarters during the financial crisis. And in the current downturn… we’re now at 8 quarters of depressed funding.
There’s similar good news in the M&A realm. It was likewise slow over the past two years due to high interest rates and concerns of impending recession. But now that interest rates have appeared to stabilize, there’s record levels of dry powder, stacked and ready for deployment says Sechi.
“Nearly half of all global buyout companies have been held for at least four years,” he told us. “In short, the conditions appear to be shifting in favor of hitting the go button.”
