Startup businesses mostly live and die by the amount of capital funding they received, and over the past three years there has been an onslaught of investment that virtually doubled as 2016 came to a close.
Venture capitalists sunk $12 billion into almost a thousand startups in the first quarter, down from the nearly $14 billion raised a year ago in just shy of 1,100 deals. And should the rest of 2017 continue on a similar path, it will fall far short of the $60 billion invested in 2016 in 4,500 deals. Unfortunately for the industry, venture capitalists and industry experts are expecting just that in 2017.
And over the past two decades, the number of companies that have received venture funding has averaged about four thousand annually, or about thousand a quarter.
Fall from Record Highs
The number of deals funded in the first quarter was slightly softer than the historical average of thousand a quarter. In addition, the number of funding deals, where a startup receives $100 million or more in just one quarter, fell drastically in the first few months of the year. The first quarter garnered ten mega-funding deals, including a billion dollar funding plan for the ride-sharing company Lyft. But the number of mega-funding deals is down from approximately 75 last year and 50 in 2014.
Additionally, non-traditional investors pulled back on startup funding in the first quarter, a segment of non-venture capital investors that includes private equity firms, hedge funds, and corporate investors. Part of the pullback from non-traditional investors was attributed to a refocusing on investors’ core businesses.
The greatest impact will likely be on companies that are taking their time going public in an IPO. Without the added support of less conventional investors, some of these businesses may want to access the public markets sooner rather than laters.
The signal of a rising interest rate from the fed’s will likely make it more attractive for these non-traditional investors to consider re-allocating their funds toward interest-related investments, rather than startups.
Tim Draper, founder of Draper Associates, DFJ and Draper University, expects the level of funding to remain flat or decline 5 percent a quarter over quarter for the remainder of the year. But valuations are likely to rise 20 percent during the year. Potentially helping to prop up valuations: a strong market and the debut of successful IPOs.
Late-stage and expansion investments already fell 23% to $7.5 billion in the first quarter, compared with the same time in 2016. That is in sharp dividing line to early-stage investments, which rose 17.7% to $4.6 billion in the quarter compared with last years figures.
Strategies for Entrepreneurs
If a startup is not currently in the process of raising capital funding or is unlikely to do so in the future, then it’s crucial to prioritize sales and validate the business model rather than spending money on research or product development. The ideal behind this strategy is to either improve the startup’s operations or generate sales through marketing.
But many entrepreneurs, nonetheless, still believe in building a minimum viable product, then raising the assets to build it into a complete product. This strategy may work for a quickly growing services startup, with a proven business model from the first day. Although, if that is not the case, the startup should focus on the business model, as well as the customer purchase process and the value chain.
A value chain determines how value is created by the startup’s product or service. For instance, under Uber’s business plan, the drivers receive value in the ability to use his or her car and phone to make money. For Uber’s clients, the value is cheaper travel, more availability of cars and the ability to use a phone to hail a ride.
Areas Grabbing Capital Funding Attention
Software has historically grabbed the largest slice of venture investment, and in the first quarter that remained the case. Software start-up investments accounted for 40 percent of the $12 billion invested. Over the past two years, investments in the Internet of things, bots, augmented reality and virtual reality have been strong.
Internet is a hot sector that is attracting venture capitalist attention, as well as areas that he specifically likes such as technology for government agencies, financial services and the medical industry.
At the early stage level, health technology, analytics, social media and ecommerce are the type of startups that frequently pitch to the M&T Innovation Fund, which is supported by the University of Pennsylvania and the Jerome Fisher Management and Technology Program.
The capital funding, a student-run operation within the M&T program, provides non-equity cash loans of up to four thousands to startups run by current students or recent M&T alumni. Since the fund was created in 2015, it has invested in ten startups. The fund aims to invest in five ventures each year.