Insights

You Can’t Always Get What You Want: Funding Supply Not Meeting Startup Demands

We have all heard the Rolling Stones classic, “You Can’t Always Get What You Want,” and in 2023, the song has new meaning for startup founders.  Pitchbook recently released their analysis of the current imbalance between the capital startups want and the money that VC firms are investing.  Here is what they found:

There was a significant imbalance between the demand for capital and actual investment in Q4 of 2022, with their analysis showing demand outpaced supply by over 145% in some instances.  They found that in general, there was twice as much demand for capital than what was supplied in that quarter ($42.8B more in demand than what was supplied).

Where was the greatest imbalance? While this is impacting startups at all stages, their data shows it is having the greatest impact on later stage startups. Their breakdown of demand outpacing supply shows early stage at 50.5%, late stage at 148.5%, and venture growth at 67.1%. In fact, they show early stage as the only stage with a Dealmaking Indicator still more startup-friendly than its pre-pandemic level. This is not surprising as we discussed in a previous blog post where we demonstrated why Series A funding has seen less of a slow-down overall than funding at later stages.

So, what does this mean for startups and investors? It means we are in an investor-friendly environment to say the least. Investors can be much more diligent about where their money is going, taking their time to find those startups they feel have the greatest chance of success. They also can demand much more favorable deal terms, leaving founders with fewer options for negotiation.

This is something I discussed with The Information last fall, noting that in 2022, investors were receiving much more favorable deal terms than in 2021. At that point, I told the publication that two-thirds of middle- and late-stage startup deals I worked in 2022 had a 2 to 3 times liquidation preference, meaning those investors would be paid back double or triple their money before other stakeholders. This is a trend that is likely to continue as we move through 2023, so it could be a prime time for investors looking to offload some of the dry powder that is piling up at record amounts.

As we move into February 2023, the new hurdle for venture capital funding for an enterprise SAAS software business is $2 million in annual recurring revenue, when last year the hurdle was $1 million in ARR.

Startups still have options, and there is funding available for those who can meet these high-performance hurdles and satisfy new levels of investor due diligence.

The only thing that is permanent is change, and the pendulum will swing back again, but for now, startup founders should know the new rules of the road.

AUTHOR(S):
POSTED:

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary. The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites. In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome.