With economic downturns the last couple of years and rising inflation, fund raising for startups hasn’t been easy. Investors are naturally skeptical about the immediate future, and the risks associated with various stages of funding have increased. But the one thing that is always constant is that of change, and many are hopeful better days are coming soon. This is especially true for many companies in later stage funding rounds that plan on an eventually IPO or acquisition. However, recent quarterly reports aren’t as favorable as hoped, and it appears startup funding issues are persisting. That doesn’t mean there’s not a light ahead in the months to come. But it does suggest startup funding woes remain and may do so for a time to come.
(Bold predicted it was getting ugly for startups and venture capitalists–read all about it here.)
When it comes to examining the current economic climate and startup funding issues, different stages of funding may be considered. Each stage poses different risks and opportunities, and recent investor behaviors for each stage paints a more comprehensive picture. With this in mind, the following offers some insights over the last year regarding seed, early, and late stage investing. This will offer a better perspective on the challenges that continue related to fund raising for startups. And it will also highlight some of the recent success stories that could indicate positive change is around the corner.
Seed and Angel Round Funding
When it comes to seed funding or angel investing for startups, there has been a clear downturn in recent years. Currently, the year-on-year change for this type of fund raising for startups fell by 39%. The primary reason for this is simply investor caution. Higher consumer prices don’t help, and neither does higher interest rates. And bank collapses over the past several months focused on angel investing also has reduced risk tolerance. As such, it seems startup funding issues in this segment are continuing and will do so for the next few quarters. Investors are simply not yet willing to invest long-term in such endeavors until the economic climate improves.
(Bad banks built to fail ultimately failed–read why in this Bold story.)
Having noted this, however, that doesn’t mean that some startups have had recent success. This is especially true in certain industries where startup funding issues are less problematic. For example, some startups in generative AI, e-sports, and job-finding software have done well despite existing challenges to fund raising for startups. One such example is Hippocratic AI, a healthcare artificial intelligence company, which received $50 million this past quarter. Without a doubt, accessing angel investors is tough currently for many firms. But it isn’t nonexistent if you’re in the right sector.
Early-Stage Fund Raising for Startups
Of the various stages of fund raising for startups, early-stage funding tends to be in the better position. That doesn’t mean startup funding issues don’t exist. But they have already survived initial launch yet are not late enough to be affected by late-stage valuation pressures. As such, they tend to have longer horizons for success potential with less risk. This is perhaps why early-stage investing has been relatively flat the last two quarters. However, at the same time, early-stage funding has also seen a substantial drop of 47% year-on-year. Understanding this, startup funding issues exist here as well, but recent stability may suggest this could soon change.
Recent funding stability is not the only positive indicator that startup funding issues may be less for early-stage companies soon. Several notable large funding series took place in Q2 of 2023 that offer hope. For example, CoreWeave, an AI cloud infrastructure platform, earned $441 million in two early stage rounds this past quarter. ReNAgade Therapeutics, an RNA pharmaceutical startup, raised $300 million in Series A funding. And Orbital Therapeutics also had a positive quarter with a $270 million Series A infusion. Of all the stages noted, funding raising for startups in early stages appear to be the best position currently.
Later-Stage Investing Behaviors
When it comes to late-stage funding, there’s little question fund raising for startups has been difficult. Over the past year, there has been a 54% drop in year-on-year funding in this category. The major impacts accounting for these startup funding issues relates to the down IPO market and lower public valuations. This is particularly evident within the tech sector. In total, fewer public offerings as well as mergers and acquisitions have occurred over the past year. As a result, investors are not as keen on late rounds of fund raising. In essence, they are concerned about tying up investments that may yield lower-than-expected returns. These issues are likely to persists as long as recessional pressures persist.
Not all is gloom and doom for late-stage funding, however. Several companies have enjoyed multi-million-dollar late series funding rounds. Those exceeding $300 million this past quarter include Anthropic, Elevate Bio, and Zipline. These companies offer AI platforms, gene therapies, and drone operations respectively. Others gaining access to over $200 million include Equipment Share and Cohere. These companies provide an online construction equipment marketplace (Equipment Share) and AI software tools (Cohere). Plus, there have been a handful of IPOs and M&As this past quarter despite the startup funding challenges present. As such, late-stage fund raising for startups is difficult but not impossible.
Future Shifts in Fund Raising for Startups
The bottom line currently is that startup funding issues continue to plague the venture capital market. Across the board, fund raising for startups is down year-on-year with most showing declines even in the last quarter. However, this could well be the trough that the market is experiencing. The presence of some major seed, early stage, and late-stage funding rounds are promising. Likewise, some IPOs and high-dollar acquisitions suggest investors are not completely averse to funding key ventures. This is particularly true in select sectors like biotech and AI. In this regard, it will be important for startups to develop strategies to survive the short-term while boosting current valuations. This is easier said than done perhaps, but this remains the environment in which startups continue to exist today.
