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It’s time for startups to grow up and get a business model

In this Tuesday, Oct. 6, 2015, photo, job applicant Lazaro Fonte, right, 24, of Miami, talks with Banana Republic assistant manager Edward Ortega, during a job fair at Dolphin Mall in Miami. The U.S. Labor Department reports on the number of people who applied for unemployment benefits during the week ending Oct. 3 on Thursday, Oct. 8, 2015. (AP Photo/Wilfredo Lee)
No one said it would be pretty.
  • Michael J. Coren
By Michael J. Coren

Climate and emerging industries editor

Published Last updated This article is more than 2 years old.

There’s more venture capital money sloshing around than ever, but it’s the hardest time in years to raise a startup’s seed round. Anand Sanwal, the founder of business intelligence firm CB Insights, said the number of first-time startup financing rounds has fallen 20% since 2015.

Big venture capital funds that dove into seed-stage investing several years ago are now pulling back, while market volatility has convinced others to be more frugal writing checks. The benefits of “optionality,” the idea that investing early to gain lucrative follow-on investment opportunities, has also failed to materialize, Sanwal said.

“There are a lot of seed funds. They’re making fewer, bigger bets,” said Sanwal in an interview at 500 Startups’ Premoney conference. “Funds are discovering it takes a lot to manage the portfolio and be value-add. So they write bigger checks for the winners.”

The level of scrutiny for startup companies has gone up as the mantra of growth at all costs as has shifted to one of profitability. That is tamping down company valuations and founder-friendly financing deals.

“You need to show a path to be sustainable, not just a story predicated on, ‘We’re going to raise another round of financing,’ ” said Sanwal. “That was it for startup business models: We’re venture-backed.”

Investors are feeling the chill with existing companies as well. Many have struggled to close subsequent rounds of financing as expectations get higher for acquiring customers and revenue.

“No one is taking risks,” says angel investor Jason Calcanis. “Winter is coming, and it’s already here for some startups.”

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