Who shall survive, and who shall fail?
May 4, 2020- Share:
Hundreds, if not thousands, of venture-backed companies are staring at dire conditions—and a real threat of running out of money.
Revenue has been challenged, and cash reserves are dwindling. This is the cohort of startups confronting whether to rely on venture capitalists for a lifeline or request a hand from the government. It's sobering to step back and take note of just how many companies could soon be on the brink of collapse. To get a sense of the enormity of the problem, take a look at those facing the most pressure to shore up cash on hand:
Revenue has been challenged, and cash reserves are dwindling. This is the cohort of startups confronting whether to rely on venture capitalists for a lifeline or request a hand from the government. It's sobering to step back and take note of just how many companies could soon be on the brink of collapse. To get a sense of the enormity of the problem, take a look at those facing the most pressure to shore up cash on hand:
- Startups usually line up funding rounds to last them 12 to 24 months. Assuming that fundraising cycle, it turns out there are roughly 7,200 US companies that are due to recharge their bank accounts with fresh capital, based on my culling of PitchBook's data. A majority of them did their last fundraising 12 to 18 months ago.
- Companies whose latest financing was largely arranged or secured in the past six months are seemingly at an advantage vs. the ones that are just now returning to the well.
- But raising new funding in this climate has gotten much harder as the pandemic crisis drags on. Venture capitalists are getting ever more selective about where they place bets now, and more of them are demanding more protections for the few deals they're willing to make.
- Each month that the public health emergency drags on results in a dramatically higher risk of startups flaming out from a cash crunch, according to Ilya Strebulaev, a finance professor at the Stanford Graduate School of Business. Most economists say we're entering the worst decline in generations.
- "If it continues like it continued in 2001, more than a year," Strebulaev said, "there will be a lot of startup failures—a lot of them."
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