Report: Startups Feeling the Effects of Tougher Fundraising Environment

Startups are reportedly feeling the effects of a tougher fundraising environment.

Some are closing down their operations, selling more quickly and for less money than they had planned, or changing their business models, The Wall Street Journal (WSJ) reported Friday (June 9).

This is happening as venture investors, bank loans and, especially, initial public offerings (IPOs) have become more difficult for startups to obtain, according to the report.

The environment is far different from that of 2021, when the wide availability of potential investors and pandemic-era government funding kept afloat startups that are now having to make tough decisions, the report said.

The amount of venture capital raised by startups in the U.S. dropped by 55% between the first quarter of 2022 and the first quarter of 2023, per the report.

In addition, the yearly internal rate of returns for venture firms in the third quarter of 2022—negative 7% — was the lowest it has been since 2009, according to the report.

Startups that still have venture capital that they raised earlier or that can get bridge funding are working to keep going until the market turns around and they can once again aim to tap into public markets, the report said.

It was reported in April that the world’s tech startups could be facing a “bloodbath” due to the funding crunch.

More than 400 companies haven’t raised new money since 2021, down rounds approached five-year highs in the latter half of 2022, and 94% of tech unicorns are unprofitable, Bloomberg reported April 24.

“When there’s a lot of liquidity, it can paper over potential bad choices or changes in strategy,” Alton McDowell, co-head of technology and disruptive commerce for J.P. Morgan Middle Market Banking, told PYMNTS’ Karen Webster in an interview posted in April.

But now, with the familiar routes of capital access less accessible, small firms need to adjust to a new reality in which “growth at all costs” no longer applies, funding rounds are declining and investors are reticent to part with capital.

“The availability of liquidity is going to be more challenging, and you’ll really have to be thoughtful around the metrics that you’re going to use to run the business — the [key performance indicators (KPIs)] that the market is saying are important,” McDowell said at the time.