Tech Startups Seek Alternative Funding as Venture Capital Dries Up

With venture capital becoming scarce, tech startups are seeking new ways to finance themselves.

That’s according to a report Wednesday (Dec. 20) by the Financial Times (FT), which noted that companies have resorted to deals like bridge loans, structured equity, convertible notes and participating bonds to keep their valuations up.

“Everyone is taking corrective action,” one Silicon Valley investor told FT.

And with this year’s market conditions expected to stretch into next year, this investor said, per the report, that even well-funded tech companies have been forced to ask: “What are the adjustments [we need] so we can live longer, how can we punt financing from next year into 2024?”

Among the companies seeking alternative financing is the delivery app Gopuff, which raised a $1 billion convertible note in March, following a $1.5 billion convertible note last year.

But these deals “kick the can down the road,” Chris Evdaimon, a private companies investor at Baillie Gifford, told FT. “They are mostly being led by existing investors who are saying we also don’t want to get into this unpleasant valuation discussion right now.”

The dearth of funding has led to a decline in initial public offerings (IPOs) this year, as deals have dipped to levels not seen since the 2008 financial crisis.

Only $207 billion has been raised from IPOs in 2022, a 68% drop from last year.

Meanwhile, research by PYMNTS found that next year will not be a good one for FinTechs looking to go public via special purpose acquisition company (SPAC) mergers.

Data showed the pace of SPAC deals slowing to the low-single-digits in most cases, especially in the payments, shopping and work-related verticals.

This issue isn’t just confined to Silicon Valley. A report earlier this month from London-based venture capital firm Atomico found the total value of public and private tech companies in Europe dropped from $3.1 trillion late last year to $2.7 trillion.

The report found that venture capital funding in the sector has dropped 18%. It also noted that 82% of founders surveyed found it harder to raise venture capital compared to 12 months ago.

“This is, by some margin, the biggest change in founder sentiment on the fundraising environment that we have recorded over the past five years of surveying the ecosystem,” the report stated.