Startups Wilt Amid Drought In Funding.

"Startups are dying amid a historic drought in venture funding, showing how an indispensable engine of Silicon Valley is suffering even as technology stocks rebound and investors swoon over artificial intelligence.

Most startups don't make it into adulthood, but for much of the past decade, amid a glut of capital and low interest rates, they often could count on several funding rounds to keep trying. Now, startups founded at or near the peak of the recent startup boom are learning it isn't so easy to stay afloat as investors pull back on spending.

"No one wants to fund something that's chugging along, whereas those businesses were able to keep on going during the boom times," said Jenny Fielding, a managing partner at Everywhere Ventures. "In the next 12 months, we're going to see a lot more companies go out of business."

Venture capitalists say they are avoiding funding businesses that lack clear signs of revenue growth or a path to profitability. 

The higher bar has led to a stark decrease in funding: Investment in U.S. tech startups declined 49% in the year ended June 30, according to data from PitchBook.

Investors also cut back on funding for U.S. early-stage startups by about half in the second quarter to $10 billion, the data showed. The pullback has accelerated the wave of new startup closures, given that this source of funding is crucial for kick-starting young businesses and helping them grow.

While startup failures are hard to track, a steady stream of venture-backed companies have shut down or downsized their businesses in recent months.

A year and a half ago, Matt Redler signed a deal to raise $20 million for his payments startup Panther. He had ambitious plans to poach bigger customers and more than double revenue.

He said his investors pulled out after events in Ukraine rattled the financial markets. Redler switched his business model to helping companies hire contractors instead of full-time workers to reduce cash burn. He spent the next year pitching more than 50 investors but didn't find any major backers. In June, he decided to shut down Panther, staving off potential bankruptcy.

Buzzer, a mobile sports platform that raised $20 million from celebrities including Michael Jordan, wound down in June, citing market dynamics. Poparazzi, a photo-sharing app backed by venture firm Benchmark that once hit the top of the App Store, also shut down.

Hopin, a buzzy virtual events startup that raised almost $1 billion in less than a year, recently sold its main business for $15 million, though it could receive up to $35 million more if it hits performance targets, according to a financial filing.

The sale was a tiny fraction of the more than $7 billion valuation Hopin received during the pandemic. The company, once feted by industry giants such as Andreessen Horowitz, is also returning a large chunk of the cash it raised back to investors, people familiar with the matter said.

Before the market turned, Panther's Redler was able to raise cash from investors at a valuation that reached $60 million. In the past year, he struggled to even get interest at a reduced price of $10 million as investors became less willing to take their chances on a young, unproven company in an industry full of competitors.

"Investors will still take a flier on a team and a dream, but it's a little less common than before," said Lee Edwards, a general partner at venture firm Root Ventures.

Last year, software developer startup Toolchain began pitching investors for a Series A funding round -- typically the first financing after an initial fundraise called a seed round. The company, which had already raised $6 million, was signing developers onto its platform and had plans to use the new cash to go on a sales and marketing blitz.

Toolchain's chief executive, Benjy Weinberger, has since been rejected by over 60 investors. The company wasn't growing revenue quickly enough to justify new funding, Weinberger said they told him. The business had been hurt by the broader cost-cutting that hit the technology industry last year, which led potential customers to cancel sales meetings, he said. Toolchain shut down this summer.

Weinberger thinks his startup might have been able to raise the cash in a more bullish market, when investors were more willing to make riskier bets on startups based on metrics such as user growth. "There was definitely an element of bad timing," he said.

Hunter Walk, an early investor in Toolchain, said that as the market changed, investors wanted to see evidence of dollars over user traction, making it difficult for the company to raise money. The investing mania that ended early last year has added to the pile of startups that are now shutting down as fundraising prospects dwindle, he said.

"What we have right now is a perfect storm resulting in more than usual shutdowns," he said.

Funding rounds usually give startups enough runway for at least two years, meaning that some that last raised in 2021 might run out of cash soon. Startups often choose to wind down a few months before their bank accounts run dry to ensure they have enough money to compensate their customers, employees and investors.

Such closures were more rare two years ago when the glut of cash pouring into venture firms led them to bankroll speculative business ideas with little prospect of long-term success. The startup downturn has since forced these firms to scale back their ambitions and invest more carefully, given how difficult it has been to raise new funds.

These days, "to get to Series A funding, you need serious revenue," said Edwards, the investor at Root Ventures. "Venture capitalists are returning a bit to the fundamentals."

Redler, the Panther founder, said his payments startup was in survival mode for over a year before he finally made the decision to shut down.

"I was eating glass for months, longer than it made sense," Redler said." [1]

1. Startups Wilt Amid Drought In Funding. Berber, Jin. 
Wall Street Journal, Eastern edition; New York, N.Y.. 12 Aug 2023: A.1.