Why VC Firms Aren’t Spending

Todd CroslandIt is no secret that startup funding has significantly decreased since the start of the new year. This was foreshadowed at the end of 2015, in which startup funding slowed down, and new companies were given smaller and smaller investments from venture capital firms. This morphed into a disappointing, and somewhat frightening, beginning of the year for early stage companies. However, the new startups do not lack funding because venture capital firms are raising less. In fact, venture capital firms seem to be doing fine in terms of the money they are accumulating. It turns out that the root of the lack of funding lies in what venture capital firms are now seeking in a startup company.

It turns out that venture capital firms have begun to accumulate a large amount of money because of the lack of faith in the startup companies with which they are connected. They are worried the companies they have put money into will crash and lose money, and they want to be prepared for this point. Although some companies have come to terms with the drying up of funding, and are responding accordingly, most are living in a state of denial. This is why venture capital firms are basically hoarding their funds.

It is all a result of the startup funding boom that occurred over the past few years, in which early stage companies were able to raise massive amounts of money and spend most of it in attempts to beat out others. With this lack of funding, they are faced with the choice to cut costs in order to be a self-sustaining company, or try to find more funding. The latter comes at a large cost and could be detrimental to earlier investors and employees that already have a share in the company.

What are venture capital firms looking for if not potentially successful companies in their early stage? As it turns out, these firms are choosing to spend their money on already-established startup companies. Companies that have already experienced some level of success are the ones being funded at this point, although the funding is still moderate. Venture capital firms are operating with the fear that startup companies in which they invest are going to collapse. Therefore, they are putting more investments into the ones they know will not.

Early stage startup companies can no longer be extravagant operations. Founders and CEOs have to get into the habit of cutting costs wherever they can, becoming a self-supporting operation as soon as they can. Startups can no longer count on venture capital firms for funding, so, until this lull blows over, all companies have to adapt.