Writing in January 2023, Mads Jensen uses Pitchbook estimates showing VC demand outstripping supply to argue that startups which delayed raising in 2022 face a year of reckoning, with continued turbulence ahead.
- In 2022, business models with poor unit economics, fuelled by a glut of venture capital, were exposed when the market turned.
- Pitchbook estimated that US VC demand outpaced supply by $42.8 billion in Q4 2022.
- Pitchbook estimated early-stage demand at at least 1.5x supply, which the author thinks is conservative.
- Despite plenty of dry powder, investors had lost their fear of missing out and were taking their time over deals.
- Many companies put off raising in 2022 with convertible notes or extended runway, making 2023 a year of reckoning.
2022 was the year when the laws of physics reasserted themselves in venture capital.
When the music stopped, upside/down business models were brutally exposed. For a while, folks had been launching (and funding) businesses with non-sensical unit economics. Put simply, the idea was to sell $300 suits for $200, and hope to make it up on volume.
In many ways, this was fuelled by a glut of venture capital.
But in 2022, this all came to an abrupt end.
Supply & Demand
New Pitchbook estimates are in for the supply and demand of VC funding. Pitchbook estimates that Q4 demand in the US outpaced supply by $42.8 billion.
According to Pitchbook, this phenomenon didn’t just apply to late-stage startups. The Pitchbook team estimates that demand at the earlier stage was at least 1.5x supply (and I think that is conservative).
Three Takeaways
- Although there is plenty of “dry powder” in VC funds, a lot of FOMO has come out of the system. Investors are more content to take their time rather than rushing to do deals.
- A lot of companies saddled themselves with far too high cost structures. Many have taken action, but some still “have it all to do”. And some business models are just no longer fundable.
- Many companies were able to put off a raise last year by using convertible notes or stretching runway. But 2023 is going to be a year of reckoning.
Expect continued turbulence in startup land.
Frequently Asked Questions
Why did the post expect a capital crunch for startups in 2023?
Pitchbook data showed demand for VC funding exceeding supply, investors were in less of a hurry to deal, and many startups had postponed raising in 2022 by stretching runway or using convertible notes.
If VC funds have dry powder, why is funding harder to get?
The post says much of the FOMO had left the system, so investors were content to take their time rather than rushing into deals, even with capital available.
What went wrong with startup business models before 2022?
Some companies were launched and funded with non-sensical unit economics, such as selling $300 suits for $200 and hoping to make it up on volume, and many carried cost structures that were far too high.