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  • Brian Cole

The Cash Crunch

Analysis by Vishal Persaud

It's been a pretty brutal year for startups and their founders looking to raise venture capital funding. And now it's taking even longer to land a deal.

Recent third-quarter data from the equity ownership platform, Carta, points to a grim state of affairs for startups that use its platform: the time between funding rounds is getting longer.

For those startups that raised a Series C in the third quarter of 2023, the average time since they last raised a Series B was 1,090 days, or about three years. And for those startups that raised a Series A, the average time from its seed round was 787 days, or a bit more than two years — though, that average wait was much shorter earlier this year, according to Carta's data.

Many of those startups last raised capital around mid-2020, just as the venture capital industry was recovering from the pandemic shock to the markets, or were lucky enough to raise during the 2021 to early 2022 funding boom.

This longer wait time between rounds isn't totally surprising since VC funding this year has been its lowest since 2018. At $36.7 billion, funding in the third quarter is the lowest quarterly total raised in over five years in the US and Canada, and a slight dip from the second quarter of 2023, according to PitchBook data. The number of deals done in Q3 versus Q2 remained relatively flat — and PitchBook analysts don't believe much will change in the fourth quarter of 2023.

"The late stage has distanced itself from the other stages, as the capital supply for its companies has been consistent in its dearth throughout the year," they wrote in the data firm's Q3 Venture Monitor report. "There is no expectation that dealmaking for US VC will shift during Q4, and the market should continue to operate as it currently is."

So, VCs are going to continue to be stingy with their capital, leaving nearly 51,000 startups in search of cash and precious VC time in a Hunger Games-esque competition for the rest of the year, and potentially well into 2024. That means available capital "will remain low until an exit market can reappear and pull money, and companies, through the venture lifecycle," PitchBook's analysts wrote.

The current state is even more acute for late-stage investing, as more VCs have backed away from writing large checks. For those startups that do get a check, the bar is pretty high. But for those companies that may not be performing as well, things could get ugly.

"On the other hand, mediocre companies that are unable to hit milestones or demonstrate progression toward a path to profitability will encounter major hurdles for future financing events," PitchBook's analysts wrote.

And we're already seeing the effects of that capital strain.

Startup extinction season is well underway and it seems as though we're seeing a startup per week bite the dust. Last week, Olive AI, the once $4 billion healthcare-focused AI startup unicorn, announced it was selling off its core business units and shutting down the rest of the company. And a few weeks ago, Convoy, the digital freight startup once hailed as the "Uber for trucking" — that raised $1.1 billion from investors like Jeff Bezos, Bill Gates, Marc Benioff and other tech notables — shut down and is selling its technology to one of its main startup competitors in the space, Flexport, multiple outlets reported.

In a memo sent to staff, published by CNBC, Convoy cofounder and CEO Dan Lewis summed it up quite well, calling the current market conditions a "perfect storm" of events to explain in part, why the company failed.

"Alongside this unprecedented freight market collapse, the dramatic monetary tightening we've seen over the last 18 months has dramatically dampened investment appetite and shrunk flows into unprofitable late stage private companies," Lewis wrote.

It's very likely that the demise of Olive AI and Convoy — among two of the most highly valued and well-capitalized startups to shut down thus far — is just the beginning of a torrent of late-stage companies about to meet a similar fate.

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