The 2024 venture capitalist forecast appears murky so far with many startup companies projected to shut down in the new year.
Thomvest Ventures Managing Director Don Butler explains the VC environment and conditions that are serving as a foundation for this early investment forecast.
"What you're starting to see now is... those companies that raised in 2021, call it two and a half years worth of venture capital, coming up towards the end of their capital run. they've tried to cut burn and cut expenses to make the capital last longer," Butler explains the circumstances to Yahoo Finance. "But at the same time, you have a revenue environment that's gotten more difficult, especially for a lot of software companies. Now you have... [that] matched with the third factor: venture dollars being invested has come way off."
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Our next guest says the theme to watch is going to be a surge in startups shutting down.
Joining us now is Don Butler, Thomvest Ventures' managing director.
Don, it is great to see you.
Sounds like a bleak forecast there for startups in 2024.
Why is that?
DON BUTLER: Well, if you go back and you look, what we had in 2021 and 2022 was we had a surge in startups that got funded.
Like one thing we track is in the same way the housing industry tracks new home starts, we track new venture starts in the form of series A financings.
And what's happened is that we saw this great bubble in companies that were formed.
And they were formed under a different regime.
And in terms of the mentality was all focused on growth, even if they're burning quite a bit.
And then we've had this massive regime shift.
And then what you're starting to see now is you're seeing those companies that raised in 21s, call it 2 and 1/2 years worth of venture capital, coming up towards the end of their capital run.
And so they've tried to cut burn and cut expenses to make capital last longer.
But at the same time, you have a revenue environment that's gotten more difficult especially for a lot of software companies.
And so now you have this in that matched with a third factor, which is that just the number of venture dollars being invested has come way off.
So suddenly, you have a very large cohort of startups competing amongst each other and looking at supply of capital that is significantly shorter.
Like one of the metrics we saw was that the demand for capital versus the supply of capital is about 3 to 1 ratio.
And so for every dollar that a venture company is looking at, there's about $0.30 on offer from the venture community.
JULIE HYMAN: Wow.
So how does that play out exactly?
So do you expect then a lot of startups to just shut down?
Will you see actually some buyout activity where you see combinations perhaps or larger companies coming in and buying them as maybe valuations go down?
How does this all play out?
DON BUTLER: I think a combination of all the above.
One metric that caught my attention was, we're at about a decade high in terms of the number of actual startups shutdowns.
So if you look at PitchBook data, so far this year there's been about 3,200 startups shut down.
That's probably somewhere between 6% to 8% of the total venture community actually shutting down in just this year.
And then on top of that, what we're seeing is, if you look at the number of financing rounds that happen compared to the height in Q1 2021, financing rounds themselves are off about 50% for series A, B, C, D. And so you have this very large cohort coming through where the financing rounds basically aren't happening.
If they are happening, about 18% of them are typically down round.
And so you have the remainder that are shutting down.
We've seen some companies go back to investors and say, I'm going to shut down because I don't think I'm going get there and I'm going to hand back capital.
And then the one other part that has made '23 difficult and looks at the outset of '24 to be difficult is, you don't have the same exit environment or the M&A environment.
And for a while, a lot of us in the venture community expected that you might have M&A roll-ups funded by the big private equity firms.
I think one of the problems has been with the cost of debt being so high that M&A roll-up activity is off as well, like PE activity is off as well.
And so you don't have this clear exit environment for companies.
Now one thing I would say is that we've seen some-- not the larger companies, not the Salesforce of the world, start to embark on lots of startup acquisitions.
I think when they've done acquisitions, they've been more transformational.
But we've started seeing acquisitions by the tier 2 public companies.
I think companies that might have $2 to $5 billion of market cap that got a good growing business that are starting to do tuck and acquisitions of like $100 million.
So we do see some green shoots on the M&A environment.
But there's not a clear place to go with a lot of your companies.
And so for us having just come off our year-end planning session, one of the metrics we're starting to track is how many of our companies have actually gotten to cash flow break even or net income positive.
Because really, if you can't count on the exit environment necessarily being there, then you count on your current investors and cutting capital and growing into the place, a point where you actually can dictate your own outcomes.
