Misery loves company. Such is the premise (kind of) of a recent piece from Crunchbase that shows the receipts on a pattern in the startup funding cycle that just makes intuitive sense.
So here is the pattern. Once venture funding dries up in a once-hot sector – think GenAI right now – the players unsuccessfully chasing the next round find themselves forced to merge or die. Or something like that.
The Crunchbase piece lists several sectors that have gone through this in recent years.
Here are a few of the sectors that Crunchbase says have recently gone through this hot, then not cycle.
E-Commerce Aggregators
Crunchbase reminds us that in 2020-21, companies like Thrasio, Perch, and Razor Group were raising money to aggregate small eCommerce brands. But by 2022 that money had essentially dried up.
At this point, the hot, then not cycle did its thing. Crunchbase cites a few consolidation plays as evidence of this. For example, Germany’s SellerX acquired Elevate Brands last year. Or Razor Group (also based in Germany) acquiring Softbank-backed Perch.
Real Estate Platforms
Low interest rates spurred the creation and funding of platforms that helped real estate buyers and investors buy and invest. Now, interest rates are up and no one is in the market who doesn’t need to be.
This shift has triggered the hot, then not cycle. Crunchbase cites the merger (announced in June) of Roofstock and Mynd as a prime example of this. Both companies are focused on helping investors in single-family rental property.
Both companies also raised a lot of money. Roofstock, founded in 2015, raised about $360 million. Meanwhile, Mynd, which was launched in 2016, pulled in more than $200 million.
Fintech
Crunchbase uses a subset of fintech – buy now pay later – to illustrate what has happened in the wider fintech space. BNPL was and largely remains incredibly popular with consumers. And at one point, BNPL valuations skyrocketed. And this helped other fintechs (online banks for example) experience some valuation inflation. This has all since come down to earth.
Crunchbase cites Empower’s acquisition of Petal earlier this year as an illustration of this reversal.
Empower is an app consumers use for cash advances. Petal is focused on delivering financing to underserved groups.
Petal, which launched in 2016, raised nearly $1 billion in equity and debt (mostly debt) before Empower scooped it up.
According to venture capitalist Lex Sokolin, writing on LinkedIn, the massive amount of money that Petal raised may have sent a false signal regarding the company’s true viability.
“Capital raised is often the metric by which we judge start-ups. Without visibility into the underlying dynamics of the business — profitability, [and] customer retention — we are left interpreting the available signals. An institutional investor putting money into a company functions as that signal, as they’ve certainly done due diligence one cannot divine from the outside,” Sokolin wrote in January on LinkedIn.
“By that metric, Petal, the fintech credit builder company, looked successful to many of us.”
Sokolin’s thoughts on Petal remind me of something I like to say about startups.
“The least interesting thing about a startup is the amount of money it has raised.”
Or at least it should be.
