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The Venture Capital Market Continues its Slide into 2023

Jun 5, 2023

Venture capital (VC) market investment activity has slowed down considerably in 2022 and 2023, according to Alan Wink, managing director of capital markets at EisnerAmper.  Alan, along with other capital markets specialists including Amanda Herson, partner at Founder Collective; Kevin Zeidan, managing director at Trinity Capital; Hillary Bush, founder and CEO of Pollen, and host Paul Ellis, managing partner of Paul Ellis Law Group, participated in a panel titled “Surviving and Thriving in the Current Climate: VC, Venture Debt, and Alternative Strategies.” It was hosted by the NY Tech Alliance and the Paul Ellis Law Group on May 24.

The panelists discussed the state of the VC market, current trends in venture debt and capital formation strategies for start-up companies and how they might increase their runway and position themselves for the future.

The VC market is hitting headwinds due to a conflation of forces, including the general state of the economy, the stubbornness of inflation and the fear of a coming recession. Throw in the failure of Silicon Valley Bank and Signature Bank and even the most seasoned investors would become at least a little jittery. 

The slowdown began in 2022 and continued into the first quarter of 2023. VCs have become much more selective when choosing companies to invest in, seeking companies with a proven disruptive business model in a large market and a clear path to profitability and an exit. According to CB Insights, total funding for startups worldwide dropped from $151 billion in Q1 2022 to about $59 billion for Q1 2023.  And the number of deals dropped from 11,149 to 7,024 for the same period. There were only 20 IPOs and only $5.8 billion of exit value realized in Q1 2023. Fundraising also took a hit in Q1 2023; only $11.7 billion was raised across 99 funds during the period.[1]

Several of the panelists mentioned that raising debt is best done when it is not needed and is very difficult to accomplish when the runway becomes less than 12 months. Many lenders have increased the amount of runway necessary for them to make a loan. Simple agreements for future equity (SAFEs) are becoming more popular especially in early unpriced equity rounds. Multiple rounds of SAFEs could have a surprising amount of dilution in both value and voting rights.   

The panel also discussed some common sense steps that start-ups should take today to increase their runway and how to position themselves for better times ahead. At the top of the list was squeezing the most value out of every dollar spent and cutting out expenses, no matter how small, that are unnecessary.

Clearly, it is becoming much tougher for seed and early-stage companies to raise capital. Even though VCs are sitting on enormous pools of dry powder, they are becoming much more cautious in their investment approach. VCs want to see companies that are capital efficient and have technologies that will disrupt large potential markets. Founders must truly understand their cash needs and the milestones that will be achieved with each round of capital. For later stage companies, investors want to see a clear path to profitability and a clear path to an exit before they will even consider making an investment.

[1] State of Venture Q1'23 Report: US - CB Insights Research


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Anthony DiGiacinto

Anthony DiGiacinto is a Tax Director and member of the Cleantech Group with expertise in corporate and partnership tax planning, ASC 740 (FAS 109), FIN 48, consolidated returns, as well as mergers and acquisitions.

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