December 2023 Venture Capital Market: Are we at a precipice?

Venture Capital winter continues - cold fronts move in.

• For six consecutive quarters, venture capital funding for startups has been on the decline, culminating in a five-year low of $36.7 billion in Q3 2023. 
• The number of venture capital deals has plateaued.
• Venture debt has also seen a downturn — deals are down by more than 20% from Q1 2022.
• The initial public offering (IPO) market has contracted dramatically. There have been virtually no tech IPOs since the end of 2021, marking the longest drought in over two decades.

Competition for funds has intensified, particularly at the seed stage, with a 15% increase in the number of early-stage startups compared to the previous year. The increase in new entrants, juxtaposed with the funding squeeze, is a formula for heightened selectivity among investors.

A concerning indicator for the startup ecosystem is the diminishing runway for a majority of these companies. With over 80% of startups having less than a year of funding left, the expected failure rate is projected to exceed that of the dot-com crash, which witnessed the collapse of nearly 750 internet startups from 2000-2002.

You can see the market stress in layoffs, lower valuations, and forced acquisitions. Full VC impact awaits an open IPO window, revealing the market-adjusted valuations. This will be the moment for VCs to adjust their books.

In response, investors are refocusing on their existing portfolios, bolstering companies with bridge rounds, which have seen a surge of over 40% in Q1 2023. This inward focus signals a shift towards sustenance and an emphasis on clear paths to profitability and revenue generation. This trend towards operational durability and profitability is mirrored in private equity, where there's a significant uptick in appointing Operating Partners and expanding operational teams.

The timeline between funding rounds has elongated, reflecting a cautious and measured approach to growth. The average time from Series A to Series B is now 787 days, and from Series B to Series C, an even more protracted 1,090 days.

The venture scene is reassessing its footing amidst a shrinking IPO space, fiercer funding battles, and a pivot to profit and endurance. Global market tremors from Ukraine, Palestine, and Taiwan are casting long shadows. In AI, corporate giants and countries dominate, leaving startups scrambling up a hill of sand. ChatGPT's new GPT marketplace has eclipsed numerous emerging players in the sector, yet VCs are still funding the space, citing ai as the next super cycle. 

For entrepreneurs, the current climate necessitates a pivot in strategy. With exits and acquisitions becoming more prudent avenues, there is a push to monetize intellectual property and technology assets before cash reserves are depleted.

Most Startups and investors alike must navigate these conditions with strategic foresight and an unwavering focus on value creation and operational resilience.

The hard truth is we are seeing good companies go under.

A cold snap, in a longer winter.