A “historic” shortage of venture capital has cut off money for start-ups, The Wall Street Journal reported.
For years, interest rates were low, capital was plentiful, and seed investors were willing to keep watering struggling enterprises. Venture firms would “bankroll speculative ideas with little prospect of long-term success,” the WSJ said.
Now, “no one wants to fund something that keeps chugging along, whereas those businesses were able to keep on going during the boom times,” Jenny Fielding, a managing partner at Everywhere Ventures, said to the WSJ.
During the year ending 30 June, venture investments in U.S. tech start-ups had plunged by 49 percent, according to data service PitchBook. In this year’s second quarter, funding for early-stage businesses also fell by half, to about $10 billion.
Lacking that nourishment, start-ups have shut down in growing numbers, the WSJ noted.
“In the next 12 months, we’re going to see a lot of companies go out of business,” she warned.
To win continued funding, new businesses need to show “clear signs of revenue growth and a path to profitability,” venture capitalists told the WSJ.
“These days, to get to Series A funding”—the next stage after seed capital—“you need serious revenue,” partner Lee Edwards at Root Ventures said in a WSJ interview. “Venture capitalists are returning to the fundamentals.”
TREND FORECAST: It’s all about cheap money and with interest rates up, the investment market is cleaning house.
First, the crypto bubble burst, washing out digital coins and NFTs that had no hope of survival. Next, SPACs went down in flames. (See “Bankruptcies Increasing Among SPAC-Merged Companies,” 2 May 2023). Now poorly conceived and badly managed start-ups are being culled.
The silver lining in an uncertain economy is that speculative investments are taken off the board, leaving investors with fewer ways to lose money.