If you strip away the AI deal-making frenzy, a harsh reality of today’s fundraising landscape comes into full view: More startups are pushing the limits of how long they can go before replenishing their cash reserves.
One of the latest casualties of this pressured environment is Moxion Power.
In a Zoom call in July, the staff of the battery-manufacturing startup got some unwelcome news: the company had run out of cash.
Moxion had recently been in fundraising talks—reportedly to raise $200 million at a $1.5 billion valuation. The startup, which was working on a zero-emissions battery technology, had raised a total of $126 million from investors including Tamarack Global, The Climate Pledge Fund and Microsoft’s Climate Innovation Fund.
But after negotiations with investors stalled, Moxion abruptly found itself strapped for funds. It furloughed most of its staff on July 19 and announced it was veering toward a shutdown.
Moxion’s flameout is a scenario that is likely to be repeated at other startups in the months to come.
In a sign of the growing stress on companies, the length of time that VC-backed companies are taking in between funding rounds has widened during the market downturn the past couple of years.
In this year’s second quarter, startups took an average of 19 months between funding rounds, according to PitchBook data, compared to an average of 15 months at the peak of the VC funding boom.
Startup founders are squeezing more from their existing cash, in hopes they’ll hit specific financial milestones before they seek fresh funding, said Mike Packer, a partner at QED Investors who invests in early-stage fintech companies.
“But if they don’t get those milestones—and from a statistical standpoint, a lot of the market will not get to their milestones— those companies are gonna be faced with hard, hard choices at the end of this year,” Packer predicted.
The AI exception
The one exception, of course, is in AI. Valuations have continued to tick upwards in particular for generative AI companies, with the median valuation of early-stage AI companies rising from $46 million to $70.6 million between 2023 and Q1 2024.
But the flood of funding going toward AI companies masks a crisis brewing in much of the startup world.
“There’s a massive cohort of companies with challenged growth profiles,” said Rajeev Dham, partner at Sapphire Ventures. But with AI deals monopolizing VCs’ attention, they’re on their own. “It’s the haves and the have-nots right now,” Dham added.
Many VCs were burned by the market pullback. From 2021 to 2024, median valuations for venture growth-stage companies dropped to $10 million from $33 million while top-decile averages fell over 40% to $130 million from $250 million, according to PitchBook data. And with the exit market still slow, VC firms—outside of the cash-rich mega-funds—have less dry powder to deploy.
During that reset in valuations, investors have raised the bar for startups’ business fundamentals. VCs are now requiring founders to show evidence of stronger customer traction and organic revenue growth—especially for consumer-facing startups.
“There is still some trepidation around those really high, multibillion dollar consumer private valuations,” said Jason Fielder, managing partner at Left Lane Capital, a New York-based consumer-focused VC firm.
The median relative rate of value creation between rounds, calculated as the annual percentage change in valuation, has continued to slow. Late-stage companies’ velocity has gone from 14.5% to 9.6% in the first six months of 2024, according to PitchBook data.
Stuck by structured deal terms
Many companies are left putting off new funding rounds for longer periods. In 2023, many did smaller bridge rounds— often with aggressively investor-friendly term sheets— to get their cashflow to break even or to be profitable. But those small bridge financings will also soon run dry.
Being cost-constrained for too long can leave founders stuck.
“As a founder, you can get burned out at that point,” said Brendan Mahony, a three-time founder and CEO of Sunset, which helps startups wind down.
When founders eventually do go out to try to raise again, they’ll be facing an uphill battle. “There’s a real allergy to down rounds in Silicon Valley,” said Lloyd Danzig, managing partner at Sharp Alpha Advisors, a specialist VC in sports, gaming and entertainment.
The first six months of 2024 has seen the largest percentage of down rounds, where financing comes at a lower valuation, in a decade, according to PitchBook data. There are also more flat rounds, which often involve additional cap-table structure.
“There’s always going to be a preference, rational or not, for new fresh companies with clean cap tables that don’t have a lot of baggage, as opposed to those that do,” Danzig said.
Those startups with too much baggage to carry are already looking more aggressively at asset sales and acqui-hire opportunities, according to Mahony. Sooner or later, they’ll have to make a decision at crunch time.
Featured image by David Gray/AFP via Getty Images
