How Fewer Startup Funding Rounds Impact Investor Sentiment

AngelList recently released their State of Venture 2024 report. In it they included an interesting, albeit somewhat confusing visual graphic- highlighting the potential canary in the venture capital coal mine. It's clear from the data that there is still a massive overhang of stale marks across venture portfolios. While medium TVPIs across all vintages has held flat over the last 2 years, the rate of price per share change, ie an accurate current valuation, is at all time lows. Only 14% of startups in the 2013-2015 vintage experienced a change in valuation in 2024 - of these 62% were increases. This is a far cry from pre-pandemic levels where nearly 33% of startups experienced a financing event, and close to 75% were up rounds(peak was 90%). What are we to make of the 86% of startups that haven't experienced a funding event in the last year - a 50% reduction from pre-pandemic activity. It's increasingly looking like most will never grow into the peak valuations they raised at during the pandemic, and as such TVPI is still considerably overstated in many cases. The startups that have raised up rounds in the last few years have proven they are still on the venture track, and still have an opportunity to realize DPIs that are multiples of their current TVPI marks. The remaining overhang likely falls into two camps. Some business oreinted toward profitable growth initiatives over the last few years - growth has slowed but they are no longer reliant on outside capital. They may never grow into their sky high 2020-2022 valuations but have the opportunity to grow at a measured pace and still exit at some point - in most cases though at valuations lower than current marks. The second group of businesses are staring down a rapidly declining runway and no clear line of sight to profitability. In these cases, TVPI is still wildly overstated with liquidity outcomes likely at small fractions of current marks. One other interesting data point in the report was the decline in the ratio of DPI/TVPI over the last few years. Across the 2013-2015 vintage, just at a time historically(years 9-12) where we would expect to see an uptick in realized cash returns, we've actually seen a decrease in DPI relative to a firms total holdings(16% in 2019 to 11% currently). Yes, some of this can be attributed to a slowdown in the IPO/M&A market, but coupled with the data above on rate of new funding rounds, it doesn't bode well. Eventually this will work its way through the system and I suspect we will start to see more visibility in the coming year.

📊 Reality Check: Only 17% of seed-stage startups raised their Series A within 24 months (Carta) This isn't just a statistic - it's a wake-up call for founders, seed investors, and startup ecosystems. Here's what it means: For Founders: - Your seed round needs to last longer than you think - Product-market fit and revenue milestones may take more time to achieve - You need to consider alternative paths to growth beyond the traditional VC timeline - In any funding scenario, user & customer acquisition and revenue matter For Seed Investors: - Portfolio construction needs to account for longer paths to Series A and an increased % of companies that never get to an A - Worth asking: is the SAFE note still the best default vehicle when fewer companies are getting to that next round? - It's time to kill the "spray and pray" investing approach For Ecosystems: - Early-stage support systems need retooling for longer journeys and fewer co's raising A-stage VC rounds - Bridge funding is more critical than ever - Alternative funding models deserve WAY WAY WAY more attention! The "24-month march to Series A" was always more myth than reality. But at 17%, we need to rethink how we support and build early-stage companies. 💭 Worth asking: Are we still too fixated on the traditional venture path when most companies need a different approach? #StartupLife #VentureCapital #Entrepreneurship #StartupEcosystems

PitchBook’s capital-demand-to-supply model illustrates how the immense amount of capital that entered the market in 2020 and 2021 impacted the dynamics of VC. Startups had previously come back to market on a regular schedule to raise new rounds, even as deal sizes increased. Now, as the market shifts to efficiency, startups have stretched themselves further between rounds. "Trapped Value". That's a new metric. Dealmaking and valuation figures have stagnated or declined across nearly all VC stages, perpetuated by a lifeless IPO market that continues to trap value. This trapped value has been negatively impacting investor sentiment for nearly a year now, particularly nontraditional investors, leading to a starved capital environment that is the least startup-friendly we've observed in over a decade. #venturecapital #venturefunding