Over my journey in Silicon Valley’s startup world, I've witnessed a multitude of shifts in the venture capital landscape. I remember when just a couple of years ago, in 2021, securing capital felt like a breeze. That time felt so promising; money was flowing, valuations soared, and it seemed the startup dream was within reach for many. But, as they say, the only constant is change. This essay aims to offer some guidance for navigating the current VC terrain during this and most likely next year.
The venture capital (VC) market, like any financial market, is subject to periodic ebbs and flows. Historically, startups have been guided by the principle of securing enough capital to fund 12-18 months of operations. This not only aids in efficient financial planning but also ensures that startups can navigate periods of capital scarcity.
However, the recent dynamics of the VC landscape have necessitated a deeper understanding and reevaluation of the fundraising strategies that startups employ. Recently, I penned an article diving into early-stage fundraising strategies. In contrast, the following analysis delves into the broader VC landscape, with a particular emphasis on later-stage startups.
The Rollercoaster of VC Availability: the Era of Overcapitalization
Not too long ago, in 2021, we witnessed what can be described as an era of 'overcapitalization.' Startups were raising more funds than they typically required. This surge was catalyzed by multiple factors: post-pandemic economic recovery, historically low-interest rates, and the assertive investment strategies of financial behemoths like SoftBank.
This frenzy resulted in an interesting phenomenon where, despite having ample opportunities to go public through lucrative IPOs, many startups chose to remain private, potentially in pursuit of even greater valuations or to maintain control without the pressures of public market scrutiny.
A Changing Tide: The Capital Drought
Fast forward to 2022-23, and the VC scenery has changed dramatically. The massive $347.5 billion that was invested in the US in 2021 starkly contrasts with the $85.6 billion in the first half of 2023. The US startup market is now facing a significant undersupply of capital.