Everyone knows that raising venture capital has been harder for startups lately — unless you are building an AI startup, of course. But instead of only talking to founders, we’re flipping the script today.
We wanted to hear from investors how their portcos are handling a cash-light environment. To that end, TechCrunch+ recently asked 11 VCs how the first half of 2023 bore out for their investments.
From their answers, it appears a startup’s ability to fundraise in today’s climate is based on several key factors, including capital efficiency, the market and its needs.
How bad was H1 2023?
Menlo Ventures’ Matt Murphy was succinct when we asked how 2023 was shaping up for his firm’s portfolio companies: “Fundraising is challenging, full stop.” [Update: Menlo Ventures reached out to underscore that Matt’s comment here is in reference to the larger industry since less than 10% of their portfolio needed to raise in the last 12 months.]
“Challenging” is a good descriptor. So is “quiet,” which is how Jason Lemkin of SaaStr Fund put it. For Kaitlyn Doyle of TechNexus Venture Collaborative, the year has been mostly “flat rounds with companies trying to delay the valuation discussion.” She added that the second quarter felt a lot like the first, with investors and startups taking a “wait and see” stance.
Other investors had slightly brighter perspectives on H1 2023. Rex Salisbury of Cambrian Ventures felt the narrative that “this is a terrible time to raise” is simply not true, especially at the early stage. That sentiment matches what we’ve seen thus far in the data: The earlier a startup goes out to raise a round, the better its chances of landing a strong valuation. Indeed, the massive repricings of the public market are yet to trickle down to seed and pre-seed deals.
M13’s Matt Grace had a relatively better last few months: “Anecdotally, in the portfolio, we have been seeing more fundraising activity within the past few months, which is always a welcome sign.” That basically counts as proverbial green shoots in Venture Land.
Still, the silver lining doesn’t stretch far. John Henderson of AirTree told TechCrunch+ that this is the most difficult market for companies raising Series B and C rounds that he’s seen in the decade he’s spent in venture.
Why is that the case? Series B and C companies are at a stage where they want to take on more capital and build their teams. This time can be expensive for a startup and often comes before it can see revenue growth. With early-stage investors sticking to their knitting and the later stages seeing little activity, these middle-stage startups are seemingly stuck in no-man’s-land.
Needs versus wants
The old venture chestnut “The best time to raise is when you don’t need to” has staying power because it has been true for a long time. It’s still true today.
As a result of the pressure on startups to limit burn rates and conserve cash in recent quarters, many portcos simply did not need to raise capital thus far in 2023, according to the investors we surveyed. John Tough of Energize Ventures told TechCrunch+ that “not a single company in the Energize portfolio actually needs to raise capital” this year. That’s impressive.
Rajeev Dham of Sapphire Ventures provided good context on how companies are managing to avoid the need to fundraise in many cases:
Most companies still have significant cash balances as well as newly raised debt balances. This means runways are still intact for most high-quality businesses. Companies raised at twice the frequency and twice the standard quantum of capital across 2019–2021, so they are sitting with four times the cash balances.
“Only one (of about 100) companies in Sapphire’s portfolio has had to raise money in the first half of this year,” he said.
Not needing to raise money can be an edge in today’s market. AirTree’s Henderson said that while many startups are pulling back growth to get cash flow and break even, the companies that manage to do so are “ironically […] often able to raise again.”
We guess it’s easier to bet on a company that can fund itself if your risk tolerance is lower than before.
Hot is hot
Another aged venture adage goes something like, “Great companies can always raise.”
Today, that could be expanded to: “Great startups can always raise, and so can AI startups.” Of course, some AI startups are exceptional, but the bar does seem a little lower for startups building in the hottest tech sector of the moment.
Jenny He of Position Ventures said AI has been one of the core verticals that her fund has invested in since its inception at the end of 2021. That prescient focus helped the firm get some markups in its portfolio companies due to the current AI boom.
Other VCs also saw markups in their portfolios during the first two quarters. Markups are predicated on up rounds, which, according to Henderson, are often seen today in two startup groups:
Our portfolio companies that have been able to raise up-rounds in competitive processes fall into two buckets: Companies with strong, capital-efficient growth that benchmark in the top decile of SaaS metrics, and those in “hot” sectors, which should come as a surprise to no one — AI tooling and applications.
As we said, if you want to raise money today, be exceptional or be an AI startup. Or just do both.
What’s ahead?
We’ll soon share many more insights from this survey, but I want to close this first entry with a couple notes on the future.
Some investors are reporting that demand for deals from the startup side has been pretty steady. “We have yet to see a dip in companies seeking funding,” said Christopher Day of Elevate Ventures. If the best startups are able to raise capital but many companies simply do not need to, it means there are a lot of startups that are not going to be able to raise money.
That mismatch could prove brutal. Logan Allin of Fin Capital expects 2023 will have “two types of M&A outcomes: forced or synergistic,” and feels the startups that are running out of cash and can’t raise any financing will be forced into a sale process.
Several investors told TechCrunch+ that there is still some pricing discrepancy in the market. Such a gap between expectations and offers could lead to failed deals, which could in turn result in more forced sales.
So while some VCs seem pretty content that the eggs in their nests will hatch, other investors seem to have more stragglers than winners, we reckon. The resulting M&A wave should be something to behold.