2024 may well become the year of the bootstrapped founder.
The startup “mass extinction event” that doomsayers have predicted for two years is likely to ramp up in 2024. New founders facing a brutal funding environment may instead opt to bootstrap their growth.
Over 55,000 VC-backed companies are operating in the US right now, according to the latest PitchBook-NVCA Venture Monitor. Many of them are aggressively competing for funding in a slow dealmaking landscape.
At the same time, over 2,000 VC firms effectively halted making new investments in startups in the first nine months of 2023. Approximately 3,200 startups failed in 2023, and there’s even a burgeoning industry dedicated to helping founders wind down their companies.
Data on capital availability, seed deals and exits all point to one conclusion: The US has too many startups.
Late-stage and venture-growth companies are demanding more than twice as much capital than is being supplied by investors, the report found.
On the supply side, the LP retreat from venture has made GPs more cautious, and nontraditional investors like hedge funds and public-private crossover investors have refocused allocations away from the asset class.
With the exception of deals in the generative AI and machine learning segment, which are still seeing aggressive valuation step-ups, VCs are doing more due diligence and being more cautious on valuations. Compared to deals in 2020 and 2021, firms now require companies to achieve cash flow break-even at earlier deal stages and emphasize a path to profitability.
For a while, depressed dealmaking was more concentrated in the late-stage and venture-growth, affecting companies closer to an IPO that had pulled in supersized checks at inflated valuations in 2021 and 2022.
It now looks like the venture downturn has come for the seeds.
At the current pace, US pre-seed and seed-stage startups are on track to raise roughly what they did in 2018 across a little more than 3,000 VC deals—more than halving 2021’s deal count.
Investing at the pre-seed and seed-stage requires VCs to be comfortable with a high degree of execution risk. Before the point of product-market fit, much of the decision to invest is a bet on specific individuals rather than the company’s traction.
And in a tougher market, smaller funds are more conservative and cautious on deals. They also have less leeway for follow-on financing rounds, according to the report.
In 2023’s slower market, more founders had to come to grips with less favorable financing terms and there was an uptick in companies going belly-up.
This strain is pushing many founders to consider acquisition offers earlier than they might have a few years ago. Ninety percent of the acquisitions of US VC-backed companies in Q1 were made either prior to or just after the company’s Series B closed, according to Venture Monitor data. That’s up from less than 85% of acquisitions in 2021.
Acquisitions of Series A- and B-stage companies can be distressed purchases, occurring when companies have essentially reached the end of their tether and investors scramble to offload the company’s remaining assets. But they can also be companies with healthy traction at attractive prices, as founders get more realistic about the likelihood of different possible outcomes in a slow IPO market.
Featured image by Orbon Alija/Getty Images
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