VC Status Check in 5 Charts
Daily Data: How's the VC correction coming along?
5+ charts on the current state of things in venture land. Series A is a dead co walking.
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Venture Capital Continues to Course Correct
Look, a tried and true way of making money as an investor is to invest in something that other people will want to invest more in later.
A hard way of pulling that off is finding an asset or a business (or class of businesses) that, for whatever reason, are under-appreciated by all the investors trying to do the exact same thing as you. Once the true nature of the company is revealed to everyone else, the other investors pile in after you in due course.
Do that enough times, however, and the fact that “other people invest after you” can morph into a self-fulfilling feedback loop.
I invest now because I will make money when others invest later because they will make money when others invest after them, and so on and so forth.
Anyways, that’s a decent way of describing what happened to Venture Capital, especially recently.1 As the supply of cheap capital grew, so too did the demand for risks to invest in, a habit that was only reinforced by the endless supply of cheap capital.
Despite all the hullabaloo, making money in VC was really just a matter of having capital to deploy, and then waiting for the next guy’s even-more capital to deploy. No future-seeing or ‘thought-leadership’ required . . . just put money in, and then more money comes out.
Of course, when the free money ended, that dynamic changed. As foretold by Random Walk (and others, and then later, many others), the venture ecosystem was headed for a tough correction—healthy, in the long run, but tough nonetheless.
The VC Correction, a Status Check in 5+ Charts
Which brings us to today’s data: checking in on that VC correction.
The short version: the correction continues.
Carta put together a 50 slide deck, but I’ll grab just a few that I thought were most interesting.
Early companies aren’t making it to the letter rounds
The failure rates for companies founded at the peak of the free money bubble are very high.
The percent of companies that secured a Seed round in 2021 that have made it to the next round of funding (i.e. the “graduation rate”) is just about half of what it was in 2019:
Biotech saw the biggest drop moving from 40% to 16%.
Basically, a lot of companies that never should have been funded in the first place are dying.2
Random Walk supposes even that Series A is dying (and if venture continues to go back to its roots, it will die).
Look, there’s basically two “rounds” that you should need:3