How the overcapitalization of VC changed the funding landscape
August 19, 2023
Our capital demand-to-supply model generates a simple output measuring how much more (or less) capital is being supplied to the US VC market than is theoretically being demanded by startups.
The inputs use historical data, which over the past decade-plus hadn't gone through much market volatility.
That, of course, changed 20 months ago when the stock market began to fall, crossover investors started to pull back from VC, and investors shifted their focus to profitability for portfolio companies rather than revenue growth.
Our demand-to-supply model has shown the VC late-stage at a deficit of nearly 3x, meaning companies currently need about three times more capital than is entering the market.
This is a huge deficit, but up until recently, the market hadn't seen some of the expected impacts. Down rounds didn't increase by any significance until Q2 of this year (15.2% of completed rounds during the quarter), and company failings or last-option M&A haven't been major storylines, either.
However, what the model can't take into account is the increasing time between rounds due to companies choosing not to raise and relying on current cash runways. Around mid-2021, the model showed that $55 billion extra has been invested into the venture market, and companies were coming back to raise at the quickest pace in our dataset.
This overcapitalization of the market has seemingly given many companies a better toolkit to navigate the current climate. Alongside layoffs and debt, two runway extenders, the venture market likely hasn't been in as bad of shape as the model shows. At least not yet.
For more data and analysis, download our free research: Accounting for the Overcapitalization of VC
The inputs use historical data, which over the past decade-plus hadn't gone through much market volatility.
That, of course, changed 20 months ago when the stock market began to fall, crossover investors started to pull back from VC, and investors shifted their focus to profitability for portfolio companies rather than revenue growth.
Our demand-to-supply model has shown the VC late-stage at a deficit of nearly 3x, meaning companies currently need about three times more capital than is entering the market.
This is a huge deficit, but up until recently, the market hadn't seen some of the expected impacts. Down rounds didn't increase by any significance until Q2 of this year (15.2% of completed rounds during the quarter), and company failings or last-option M&A haven't been major storylines, either.
However, what the model can't take into account is the increasing time between rounds due to companies choosing not to raise and relying on current cash runways. Around mid-2021, the model showed that $55 billion extra has been invested into the venture market, and companies were coming back to raise at the quickest pace in our dataset.
This overcapitalization of the market has seemingly given many companies a better toolkit to navigate the current climate. Alongside layoffs and debt, two runway extenders, the venture market likely hasn't been in as bad of shape as the model shows. At least not yet.
For more data and analysis, download our free research: Accounting for the Overcapitalization of VC
Kyle Stanford, CAIA
Lead Research Analyst, Venture Capital
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