As Investors Get Picky, Startups Start To Struggle

A not so very long time ago — about a year and a half — VCs and private equity groups were enthusiastic about innovation — and deeply worried about missing out on the “next big thing.”

A lot of questionable ideas got funding — the WSJ this morning noted Beepi Inc, a business that specialized in selling cut-rate cars with big, shiny bows on them.

They are not around anymore — $120 million in funds raised was not enough to get to profitability with its idea, and it found it was unable to raise more cash from impatient investors. As of February, Beepi closed its doors, laid off its 270 employees and packed up the ping-pong table in its Mount View HQ.

In 2014 and 2015, mutual funds, hedge funds and other investors dropped billions into companies that these days seem a little too quirky to ever get to an IPO or buyout.  As of 2017, investors are a bit more interested in what they can predict will make money going forward — and investment in U.S. tech startups plummeted by 30 percent in dollar terms last year from a year earlier.

It’s not that no one is getting funding — it’s just that everyone is no longer getting funding.

“There are companies that everybody wants to invest in, and there are a large set of companies that almost nobody wants to invest in,” said venture capitalist Keith Rabois of Khosla Ventures.

But for firms that looks like strong bets only to lose their investors confidence, the story is quite different.  They are now spending through that cash fast — as they hope their moves to get big fast will translate into getting profitable now.

“They’re like the walking dead,” said David Cowan, a partner at Bessemer Venture Partners, who expects a steady stream of failures.

In 2014 and 2015, more than 5,000 U.S. tech startups collectively raised about $75 billion, according to Dow Jones VentureSource—but much of that funding went to about 294 tech start-ups that raised at least $50 million apiece. Almost three quarters of those companies — 216 — have neither raised money nor been acquired since the end of 2015.

Startups tend to raise funding every 12 to 18 months.

Instead, a lot of startups have said goodnight — Quixey, Zenefits and Medium have all raised over $100 million — and have all closed their doors or drastically cut staff of late to deal with the great cash crunch.

“There’s going to be a shakeout” for companies that can’t show a profit, said James Beriker, the chief executive of meal-delivery service Munchery.