The slowdown in VC deals and valuations shows not every startup is a Tumblr

Horowitz: As Scooby Doo once said, “Ruh roh.”
Horowitz: As Scooby Doo once said, “Ruh roh.”
Image: Reuters/Stephen Lam
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These are hard times for venture capital firms. Fundraising for US-based VCs fell to its lowest period in about two years in the second quarter, dropping to $2.88 billion. That’s a 54% drop from the same period a year ago. In the meantime, the number of venture capital investments in the second quarter is at its lowest level since 2009, according to a report from PricewaterhouseCoopers and the National Venture Capital Association.

With 913 deals, VCs invested $6.7 billion in the second quarter, which is a 12% rise from the first quarter but almost a 22% drop from the same period last year. The lower amount could reflect that fact that, with new technology, funding a startup these days is cheaper than before. But it could also mean startups are having a harder time raising as much money from VCs.

Ben Horowitz of venture capital firm Andreessen Horowitz (which hasn’t had trouble fundraising) recently wrote about the changing environment and observed valuations declining from previous fundraising rounds. Still, even if it isn’t an ideal moment for your startup to raise money, Horowtiz said “you are going to have to swallow your pride, face reality and raise money even if it hurts.”

Venture capital firms are also facing increased competition from corporations that have their own VC funds, crowd-funding and other sources. Decent returns are also harder to come by, partly because VCs’ holding period for middle-stage investments is getting longer. (Due to lower valuations and availability of debt financing, more startups are delaying their IPOs). The Cambridge Associates Venture Capital Fund Index showed that as of March 31, the 10-year return for VCs was about 7.36%, compared to the 8.53% return of the S&P 500 or the 8.94% return of the Dow Jones Industrial Average.

The trend doesn’t jibe with prominent success stories like startup company Tumblr, which had little proven revenue before Yahoo bought it for more than $1 billion. But not every startup is a Tumblr. Startups and VCs alike have to work harder to prove to investors that their ventures are worthy of funding.