Venture capitalists raised more money in the first three months of the year than during any quarter over the last decade, rivaling their haul during the infamous 2000 dotcom bubble, reports the National Venture Capital Association.
You’d be forgiven for thinking investors would want to invest a good chunk of that $12 billion in new companies “disrupting” the status quo. But investments in early-stage startups actually fell by about 5% in the first quarter, part of a larger retrenchment among early-stage investors, according to Mattermark.
Investors are raising so much, in part, because they can. Returns being generated from the rest of the economy are poor. Interest rates remain at historic lows, and few assets are showing signs of life. French financial services firm Societe Generale called 2015 the worst for investment returns in almost 80 years. Even stocks, the best asset class, yielded just 2%, including dividends.
Money managers are eager to find productive places to park their cash. That’s driven hedge funds, corporate venture investors, and mutual funds into the arms of venture capitalists, alongside the usual suspects of pension funds, family trusts, and endowments. They’ve handed over their money at record rates in recent years (although seem to be pulling back slightly after a string of startup valuation markdowns in 2015 that’s continued into this year).
Even as VCs are stockpiling the dollars, the earliest-stage investors (angel and seed stage) are running for cover. Investors and startup founders told Quartz that they’re discussing ways to start cutting expenses and look profitable, anticipating cash will not be easy to find. “There’s been a shift,” says Paul Boyd at wealth management firm Clear Path Capital, who watched investors pull back the reins this fall. “People started to say, ‘Let’s run like a normal business, let’s put a budget in place that’s more conservative than growth at all costs.'”
Young startups are finding it difficult to land their second or third round of funding without impeccable growth, revenue, or engagement numbers. The percent of seed-funded startups that raise their second or third round has plummeted in recent years, according to Mattermark. The business analytics company found second financings fell from about 45% of seed-funded companies in 2009 to about 5% in the final months of 2015. While some companies may achieve profitability (and forgo future rounds), competition for later-stage investment is cutting out many companies as the bar for seed-funded companies gets higher.
For established startups, the mantra seems to be stay private longer while securing big valuations from private investors. PitchBook say that’s lowering the total number of deals, while inflating the check size, which suggests there will be “fewer financings of proven companies” in the future. Exits of venture-backed companies hit their lowest point last year ($49 billion; registration gate) since 2011. That drought of new technology IPOs and acquisitions is putting the squeeze on younger companies to show they can achieve profitability, or an exit, before the money runs out.