July 7, 2016
VC investment in unicorn startups has hit an all-time high, according to a recent study from Pitchbook. In the second quarter of 2016, investments in startups totaled $22.3 billion.
However, these investments weren’t spread out: a larger chunk than ever went to the unicorns, those startups valued at a billion or more. Early-stage startups, meanwhile, are still finding it increasingly tough to land the funding they need to survive.
Uber, for instance, closed a $5.6 billion round this last quarter, with a valuation of $61 billion. The number was an entire 28 percent of all funds raised that quarter, according to Pitchbook.
There’s a Series A Crunch
VCs are sharply slowing Series A investment despite their upswing in investment overall: they aren’t pioneering new startups, but they are supporting the ones that have proven successes. In other words, they’re ignoring risk.
It’s a move that’s safe, but doesn’t live up to the potential of the title “venture capital.” Nothing ventured, nothing gained, as the saying goes. But you don’t want my platitudes. Here’s Pitchbook to explain the bottom line:
“Angel/ seed activity will continue to moderate into a plateau at best or further diminish as investors remain cautious. In the meantime, microfunds will likely consolidate or wash out given lackluster performance. Meanwhile, the barriers to Series A or significant institutional funding will remain quite high, given the sheer crop of opportunities still available.
The funnel of money at early stages has narrowed and is narrowing in that semi-nebulous area between seed and Series A. Consequently, the angel/pre-seed/seed environment will remain fragmented, with many follow-ons within that arena, and relatively fewer Series As on a historical basis. And so, there will be a contraction, if not an outright crunch.”
VCs Are “More Thoughtful”
PitchBook founder and CEO John Gabbert spoke about the trend in VC investment in a recent statement reported on by Geek Wire:
“Massive mega rounds for companies like Uber and Snapchat are certainly driving up the level of VC dollars invested in the market, but the mentality amongst VCs has shifted dramatically. In years past, many investors were in bull market mode, making big bets on all types of companies. But today, VCs are more thoughtful about the types of investments they make. The decline in deal volume overall could be a result of this shift.”
Given the direction that VC investment is heading, new startups need to focus on turning a profit and cutting burn rate as quickly as possible.
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