Late-stage startups are facing a grim reality when it comes to VC funding. Capital is scarce, and it’s becoming increasingly difficult for startups to secure deals. This year has been particularly brutal for startups and their founders in their quest to raise venture capital funding. The situation has only worsened as landing a deal now takes even longer.
According to recent data from equity ownership platform Carta, startups using its platform are experiencing a challenging funding landscape. The time between funding rounds is lengthening, indicating a tough state of affairs. Startups that raised a Series C in the third quarter of 2023 had an average time of 1,090 days since their last Series B round, equivalent to about three years. For those that raised a Series A, the average time from their seed round was 787 days, a little over two years. However, earlier this year, the average wait time was much shorter.
Many of these startups last raised capital around mid-2020, just as the venture capital industry was rebounding from the pandemic’s impact on the markets. Alternatively, they were fortunate enough to raise funds during the funding boom of 2021 to early 2022.
The longer wait time between funding rounds is not entirely unexpected, considering that VC funding this year has hit its lowest point since 2018. In the third quarter, funding totaled $36.7 billion, marking the lowest quarterly total raised in the US and Canada in over five years. It also saw a slight dip from the second quarter of 2023, according to PitchBook data. The number of deals completed in Q3 remained relatively flat compared to Q2, and analysts at PitchBook predict little change in the fourth quarter of 2023.
As a result, VCs are tightening their purse strings and remaining conservative with their capital. This leaves approximately 51,000 startups in search of cash and valuable VC time, competing for resources like characters in the Hunger Games. The available capital is expected to remain low until an exit market reemerges and pulls money and companies throughout the venture lifecycle.
Late-stage investing is experiencing the brunt of this capital strain, with more VCs becoming cautious about making substantial investments. Startups that do secure funding must meet high expectations. However, for companies struggling to perform, the future could look bleak. PitchBook analysts emphasized that mediocre companies unable to reach milestones or demonstrate progress toward profitability will encounter significant obstacles in securing future financing.
The scarcity of capital is already having adverse effects, with startup extinction season well underway. As weeks pass, we witness the demise of various startups. One example is Olive AI, a healthcare-focused AI startup valued at $4 billion, which recently announced the sale of its core business units and subsequent shutdown. Another high-profile casualty is Convoy, the digital freight startup known as the “Uber for trucking,” which raised $1.1 billion from notable investors but ultimately shut down and sold its technology to competitor Flexport.
Convoy cofounder and CEO Dan Lewis attributed the current market conditions to a “perfect storm” of events leading to the company’s failure. The freight market collapse and the tightening of monetary flow into unprofitable late-stage private companies significantly impacted investment appetite.
Unfortunately, the demise of Olive AI and Convoy may just be the beginning. It’s likely that more late-stage companies will meet a similar fate in the coming months. The challenging funding landscape and high expectations from VCs create a challenging environment for startups, reinforcing the need for innovation and strategic approaches to secure funding and ensure survival.
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