In 2021, when? Roshan Patel was busy raising his startup Walnut’s first round of funding, his email inbox overflowing with investor interest. Venture capitalists loved his idea of applying the rapidly rising concept of buy now, pay later, a $100 billion industry, to health care bills. Patel raised $3.6 million that spring and kept in touch with a few investors who might get more money as the company grew.
But when Patel sought a second round of funding in February — after public markets took a nosedive — investors were less warm. VCs now drilled him with questions about unit economics, sales efficiency, and a path to profitability. “These are questions that I expected to come later,” says Patel, as the company matured. When he guided investors through the startup’s mission and goals, “It was like, ‘Okay, but what about the financial stuff?'” Patel stopped pitching Walnut as “Confirm to Healthcare,” as the shares of Affirm had fallen by 90 percent by then. In May, he closed a $10 million round, with another $100 million in debt financing.
Meanwhile, the public and cryptocurrency markets have clearly fallen and the 2021 VC funding fest is over. Start-up founders, meanwhile, are dealing with the hangover. According to a report from Crunchbase, global venture capital funding fell by 26 percent in the second quarter of 2022. Early-stage funding fell by 18 percent, suggesting problems in public markets have now trickled down to smaller startups, which tend to be better protected from economic calamities. The sudden change has left some founders whiplashed and others regret not raising funds sooner.
“Timing is everything,” says Emily Smith, the founder of ed-tech startup TeleTeachers, which began raising its Series A in April. can close and move on. But it is no longer the fall of 2021.” Smith is still in talks with investors.
Smith says her startup has enough money in the bank to weather a funding crisis, but is concerned about the company’s valuation. According to a report from Pitchbook, first-round valuations fell 16 percent in the second quarter of 2022 — the first drop since the start of the pandemic. If a startup is undervalued, founders may be tempted to give up too much equity to increase their overall funding and face fundraising problems in the future.
At the same time, too high valuations can also cause problems. Last year, 340 companies achieved unicorn status, with valuations exceeding $1 billion. Some have since been dehorned by the market turnaround, and many are struggling to cut spending or lay off workers. Some had to settle for “down rounds”, accepting new investments at a lower valuation than before. Klarna, the pioneer of buy and pay later, raised $800 million from investors in June, but had to downgrade from $46 billion to $6.7 billion, decreasing its value by about 85 percent.
