Metrics Drive Early-Stage Funding Amid VC Funding Drought

Startups seeking seed and Series A funding are facing the leanest money landscape in more than 10 years and now have to show metrics that illustrate a strategy that leads to revenue and profits.  

The pandemic helped fuel an already robust funding environment that kept startup valuations on an upward trajectory for many years, the Wall Street Journal reported on Thursday (July 21). Fear of missing out on the best deal drove venture capital firms to rush through the background research on new startups. 

“The seed and Series A funding environment is the toughest I’ve ever seen in my career managing a fund,” Jeff Morris Jr., who manages a crypto-focused early-stage fund called Chapter One, told the WSJ. “It will be painful in the short-term.”

See also: To Survive Funding Drought, Startups Must Think Like Camels, Not Unicorns

For venture capital firms looking for a quick IPO and easy profit, the new reality is sobering, PYMNTS reported on Wednesday (July 20). The current climate has VC firms offering less money for larger stakes. 

Startups at the earliest stages are now expected to show metrics for revenue and profits, something that wasn’t a priority for investors looking for the hottest new startups, the WSJ reported.

While funding is drying up, startups are also conserving cash and keeping a close eye on their balance sheets.

“In this climate, my mind-set has totally shifted. It’s close sales, close sales, close sales,” Anurupa Ganguly, CEO of Prisms of Reality Inc., told the WSJ. The startup is looking to raise a Series A round in the fall. “When things tighten, it forces founders to be far more rigorous.”

Read more: Economic Gloom Puts M&A Market Back Into Value Mode

The record number of initial public offerings (IPOs) and special purpose acquisition company (SPAC) deals in 2020 and 2021 is culminating poorly for some of the hottest stocks of the pandemic, PYMNTS reported on Thursday (July 21). Now, high valuations and deal-making have given way to a more conservative, cautious approach.