VC Funding Is a Pipe Dream, as Investors Pour Money Into Fewer Companies

The number of venture-funded companies has been declining for five consecutive quarters.
VC Funding Is a Pipe Dream, as Investors Pour Money Into Fewer Companies
Image credit: Shutterstock

Free Book Preview Money-Smart Solopreneur

This book gives you the essential guide for easy-to-follow tips and strategies to create more financial success.
3 min read

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.

Related: Starting May 16, Entrepreneurs Can Raise Money in a Whole New Way. Here's What You Need to Know.

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.

Related: VC Funding's Gender Gap Is Hurting the Marketplace

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.

More from Entrepreneur
Our Franchise Advisors will guide you through the entire franchising process, for FREE!
  1. Book a one-on-one session with a Franchise Advisor
  2. Take a survey about your needs & goals
  3. Find your ideal franchise
  4. Learn about that franchise
  5. Meet the franchisor
  6. Receive the best business resources
Save on an annual Entrepreneur Insider membership through 5/8/21. For just $49/yr $39/yr, you’ll enjoy exclusive access to:
  • Premium articles, videos, and webinars
  • An ad-free experience
  • A weekly newsletter
  • Bonus: A FREE 1-year Entrepreneur magazine subscription delivered directly to you
Make sure you’re covered for physical injuries or property damage at work by
  • Providing us with basic information about your business
  • Verifying details about your business with one of our specialists
  • Speaking with an agent who is specifically suited to insure your business

Latest on Entrepreneur