Is the funding winter going to get worse?
Carta is a treasure trove of useful information. Since it manages the shareholders' list (known as the cap table) of thousands of startups, it has access to brilliant insights that few other companies can match. This chart caught my eye. It shows more startups shut down in Q3 2023 than in any of the previous 19 quarters. 2019 to 2021 were amazing years for the global venture capital industry. Easy money supply led to massive funding rounds and astronomical valuations. The situation has since worsened. The Russian invasion of Ukraine started a downward spiral for the global economy. VCs started calling it funding winter. Startup funding dried up and cash-guzzling startups started to close up shop. Where are we headed in 2024? The startup funding might remain tight for the next year or so. But we’re nearing the end of this meltdown. Why? We can broadly classify startups into two classes: 1. Those that survive liquidity crunch by becoming profitable (increasing revenue, lowering expenses) 2. Those that go bust because they run out of cash Most startups raise capital for 18-24 months. The underlying logic is they will raise another round after 24 months at a higher valuation. So, the startups that failed in Q3 2023 most likely last raised money in Q3–Q4 2021, the peak of the easy money era. The surviving startups from this cohort have another quarter to two to go before they run out of money. It's unlikely that these cash-guzzling startups that raised capital at the peak of funding summer at huge valuations will find new investors. The ones that have become profitable or reduced their cash burn significantly will survive this winter. But the ones who are unable to turn around are on their last legs. They’ll go bust over the next two quarters. The next cohort (Q1–Q2 2022) comprises cash-efficient companies because they raised money in tough times. They will grow steadily and raise capital again once the market improves. Hence, we can expect a lot more bankruptcies over the next 2 quarters, and then expect this number to go down even if the funding winter continues.