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A couple years ago, investors were begging to put their money into many startups, and startups were happy to comply.
But that has started to change, says GV (formerly Google Ventures) managing partner David Krane.
“First half of last year into the summer, it was very common for a series B entrepreneur to walk in and put their hand out and ask for $50 million or something Herculean like that,” Krane told Business Insider.
“I’d say those meetings are the exception, not the norm now.”
Krane got used to seeing early startups raise more than $10 million in their earliest rounds, even if they hadn’t found a product/market fit, built a complete team, or even finished engineering the product.
“Traditionally, those kinds of milestones would be much more mature before a company would secure $10M in funding,” Krane said.
That pace of investment has changed in 2016 so far. Those ‘Herculean’ sums aren’t being raised as much and the valuations have petered out as well. CB Insight noted a second straight quarter of declining investment to startups. As for the creation of “unicorns”, only five companies reached billion-dollar valuations in the first quarter of 2016, compared to 25 new unicorns in Q3 of 2015.
“I think there’s been a healthy-resizing of expectations on both sides of the table and I think it’s still early in terms of some of the corrective outcomes that are inevitable as a result of some of the excitement and the hysteria of last year,” Krane said.
For one, companies that are trying to get from seed funding to a Series A might miss a now much higher funding bar, he predicts.
“There are a lot of people who are having trouble getting to the other side of that bridge if you will. I think that expectations across the board are much higher for what defines a company that is Series A fundable than say a year ago,” Krane said.
The funding crunch has forced companies to be more creative in order to survive. Some are taking down rounds, while others are repricing previous rounds or even resorting to a full recapping of the company.
Krane is bullish that some companies will find an M&A exit if they need one, but otherwise he’s advising GV’s companies to be smart on cash:
“You’ve got to keep investing in the business and anticipating and growing where appropriate, but I don’t think you can keep playing this game where you spoil yourself with excess or competing with your neighbor down the road that offers six free meals a week when you only offer four….I think companies that were distracted and spent on the wrong thing …will certainly not be able to show the numbers that will be able to earn them additional equity. And in turn will be faced to consider debt, or even worse, have to fire sale a business or shut a business down. “