VC Funding Is a Pipe Dream, as Investors Pour Money Into Fewer Companies
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The reality is harsh for entrepreneurs who seek to land venture capital -- as in it's very unlikely. According to a new report, the pool of VC-funded startups is becoming even smaller.
Nearly 2,000 U.S. investors deployed close to $15 billion in venture financing to nearly 1,800 companies during the third quarter of this year, according to Venture Monitor, a report released today by investment data provider PitchBook and the National Venture Capital Association (NVCA). This marks the fifth consecutive quarter in which the number of companies receiving venture financing has declined.
Despite this fact, the findings reveal that VCs are not being stingy -- they’re simply financing fewer companies. Total venture capital invested in the first three quarters of 2016 totaled $56 billion. Investments are on track to reach $74 billion by the end of the year, just below 2015's $79 billion figure -- the record for the most capital invested in a single year.
A few shifts have taken place. Median seed and early-stage deal values have risen in recent years, and late-stage deals are fewer in number and total value. “Total activity has fallen but investors have placed more capital with select stand-out companies,” the report states. “This was shown last quarter as the concentration of capital in deals exceeding $25 million accounted for the largest amount we’ve seen in a decade.”
Only a few thousand companies close venture deals annually, and as fewer companies get larger slices of the pie, entrepreneurs must consider alternative funding options -- especially if they aren’t well-connected or didn’t attend a VC-favored university. The report points to micro funds, raised prior to seed and angel investing rounds, along with accelerator programs, as rising trends related to a decline in smaller-sum early-stage financing.
A drop in the number of deals indicates stiffer competition for women and people of color to secure venture capital. In another recent analysis, PitchBook found that less than 10 percent of U.S. companies that have received a round of VC funding since 2005 have at least one female founder. Last year, CB Insights revealed that only 1 percent of funded founders are black.
Campaigns such as #FacesOfFounders seek to raise awareness of the true diversity among entrepreneurs and inspire budding founders from all backgrounds to pursue their dreams.