Declines in the venture capital market arehitting startupsof all sizes, but the onesleft particularly vulnerable arethe thousands of young companies that raised seed funding during headier times just a year or two ago.
The seed frenzy peaked in the first quarter of 2015 when more than 1,500 startups raised their first rounds of capital, according to research firm PitchBook Data. Many of those companies are now running out of cash, andmost wont be able to get more.
Dying is a factof life for most startups, but corporate graveyards are filling more quicklythis year. The pain is likely todrag on for another 12 to 18 months as early-stage companies fizzle out earlier than usual or limp along without access to more capital, said Gus Tai, a general partnerat Trinity Ventures.The pressure is even more acute, hesaid.
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As many as half offledglingstartups today are looking to sell shares or take on convertible loansatthe same price or terms as their previous rounds, said Jim Kim, a partner at Formation 8 whos raising as much as $200 millionfor a new VC fundcalled Builders, according to a securities filing. He said such deals were rare a couple years ago when enthusiasm was higher andVCs were willing to pay a premium. It is a completely different environment now, Kimsaid.
Despite their recent pullback, American VCs arent strapped for cash. Theyre on track to raise the most money since the 2000-era bubble.The top firms are raising larger funds, which is pushing many to make larger early-stage investments in the hopes of driving returns.Accel Partners, Andreessen Horowitz and Founders Fund have raised funds of more than $1 billion each this year.
While many otherVCs, including Builders, continue to make smallerinvestments, the big firms are driving up the average investment size in young companies.The median valuation of early rounds involving professional investors has reached $15 million, more than any time in the last five years, saidWilson Sonsini Goodrich & Rosati, a law firm that advises startups.Exclusive insights in your inbox, from our technology reporters around the world.
However, the $55.5 billion of venture moneyspentin the first three quarters of the yearfell short of the $61.2 billion invested in the same period last year, according to PitchBook. The overall startup market has rebounded in the last couple months but is still down 15 percent from its high last year, according to the Bloomberg U.S. Startups Barometer, an index that tracks VC funding and deals.
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More than 11,000 angel and seed investments were made in 2014 and 2015, PitchBook said. Since then, the market has become depressed at all levels, but the imbalance in earlier stages, especially the one knownas Series A, has created intense competition for survival among young companies. The number of companies able to raise their second or third roundsof funding fell 25 percent last quarter compared with the same period in 2014, PitchBook said.
Etai Beck raised a seed round in 2014for his corporate software company Folloze. He later sold more shares underthe same terms, bringing the total size of the round to $3.3 million.This year, as he looked for a second round of funding, he found that investors are way stricter, with higher expectations for revenue and customers.The company eventually found its way to $7.3 millionin September.
The new, higher bar is fine for companies that have very recently raised seed capitalthey knew what to expect, Tim Bliamptis and Judith Elsea, partners atWeathergage Capital,wrotein a blog post in August. Its not so fine for previously-seeded companies that had been operating under the old milestone expectations.
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This article originally published at Bloomberg here
