Startups

Yeah, funding for creator-focused startups is drying up

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Image Credits: Bryce Durbin / TechCrunch

Services that help folks make, share and profit from creative works — Maven to Bounty to Substack to Patreon to Canva — have proliferated and grown in recent years.

The rise of creator-focused startups was not an accident; instead, a secular trend of more accessible software for more diverse areas of creative work was met with a COVID-induced economic reshuffling and a gain in the amount of time the average person spent consuming in the ensuing quarters. Advertising spending rose as well. The confluent factors led to a boom in creator-focused startup activity that got busy in 2020 and continued into 2021.

Not every creator economy startup is built for creators

However, recent data indicates that startups in the creator-focused market are raising fewer venture capital rounds, limiting total investment in the technology category.

What’s going on?

The waning pandemic is perhaps contributing to the slowdown in funding for creator-themed startups; after all, with folks back in the world, products and services that focus on IRL things are perhaps more in vogue than what we might create or consume at home. But there’s more at play.

Large technology companies, nearly all of which eat at least in part off of advertising incomes, have been discussing a slowdown in that market for some time now. Recalling our coverage of Q2 2022 BigTech earnings, we noted that the majors were reporting less demand for advertising-driven products.

Earnings call transcripts from the second-quarter earnings cycle told a similar story. Snap informed investors that “as many industries and verticals have come under top line or input cost pressure, advertising spending has been among the first areas impacted.” Alphabet noted a “pullback in spend by some of the advertisers,” adding that it was “challenging to disaggregate the uncertainty” that was impacting different businesses and sectors.

A broad-based slowdown, then, at least in the second quarter. Since then, the news has not improved. In an August investor update, Snap cited “macro headwinds such as high inflation, rising interest rates, and geopolitical risks disrupting many industry segments that are critical to growing advertising demand,” adding that as “advertising dollars in aggregate grow more slowly, competition for these dollars intensifies.”

Not all advertising markets are struggling equally. MoffettNathanson senior analyst Michael Nathanson told an industry publication in September that “digital ad growth across the major online platforms is decelerating and is set to further fall in the third quarter,” though traditional TV spending has been sturdier.

Returning to our theme of creator-focused startups, we care much more about the online advertising market than we do anything related to television.

The advertising market has been showing signs of weakness for quarters now and doesn’t look set for a near-term recovery. That could heavily impact creators that depend on advertising or other forms of promotional incomes — and perhaps the platforms that back them as well.

What about the startups?

As someone who makes a living creating something for others to consume, I have a soft spot for creator-focused startups. I would like to see them do well, if for no other reason than that I like to see creative work well remunerated. The better the creator market does, I suspect, the more viable making art — in all forms — will become. A rising tide and so forth.

But there’s been an indication for some time now that things are getting harder in the fundraising market for creator-themed startups. From a very high level, how many creator-focused startups have you read about lately? Now cast your mind back a year or two — how different was the figure? (Note that we are somewhat far today from the initial Substack boom and the Clubhouse craze.)

But let’s not merely lean on our own guts. There’s more to the story. In late August, Insider wrote up notes from four creator-focused startup founders on their fundraising market. The resulting image is one of founders adjusting to a far different venture market than they last faced, and one, by our read, in which many already-funded startups will struggle to raise in.

Advertising incomes are pretty important for creators. To pick an obvious example: On major platforms like Twitch and YouTube, advertising spending (either via platforms or directly to creators building for those platforms) is critical. It’s the same in other locations, albeit in different ways: Instagram is ad-powered but creators also land their own deals for promotion and other services.

In short, while some creators monetize their fans directly — an effort that we presume is impacted by the same macroeconomic conditions that advertising is dealing with — the ad market is a key input for creators, as well as the services they employ to reach and monetize their audiences. With fewer ad dollars to go around and more competition in the space for those same bucks, it’s perhaps not a surprise that creator-focused startups are struggling today.

This predicament has drawn external commentary.

Adam Ryan, formerly of LightShed Ventures and today the CEO of Workweek, wrote on Twitter recently that “creator economy platforms that raised millions are pivoting and struggling to raise more money,” and that “almost every creator economy platform is struggling to scale.” His argument is largely that many creator-focused startups were predicated on the idea of more folks becoming creators. But with the underpinning advertising market slowing, how likely will that prove to be?

Nate O’Brien, a creator himself and an investor at Roadrunner VC, had the following to say:

The slowing ad market likely impacts key inputs to creators themselves and, we presume, the platforms built to support them. That means startups. The final thing we need to check on today is what venture capitalists are saying with their checkbooks.

The venture angle

Insider cited a piece of Crunchbase News reporting that tracked the growth (or lack thereof) in creator-economy-focused venture investment. To update the analysis, TechCrunch re-ran the same search, breaking the data into quarterly results for this year. The data works out as follows:

  • Q1: 58 rounds worth $343.2 million.
  • Q2: 42 rounds worth $336.0 million.
  • Q3: 19 rounds worth $110.2 million.

That’s brutal and a sufficiently steep decline to indicate that even with some traditional venture-reporting lag, we are seeing a stiff slowdown in the amount of capital that creator-focused startups are able to raise.

A slowdown in key macroeconomic conditions married to more conservative external capital sources should prove a recipe for startup deaths. Or at least small-ball M&A among the stronger players in the space that are able to scoop up less successful startups on the cheap.

There will be survivors, and even winners, from the startup rush to build creator-focused startups. But with so much capital sloshing around the last few years, it may be that more startups were built and funded in the space than made sense, let alone could make it through a downturn. If only there had been some warning, yeah?

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