Late stage startups are running out of options. For every $3 they want to raise, just $1 is available. From a new Pitchbook report:
The capital landscape during H1 has not seen significant improvement for late-stage and venture growth companies. The capital supply and demand dynamic is still skewed, with late-stage companies experiencing a particularly pronounced imbalance. Demand for capital in the late-stage sector is about 2.84x more than the available supply—a stark difference compared to the 1.29x overextension observed in the venture-growth stage.
Getting to Breakeven
These startups are valued in the hundreds of millions of dollars, if not more. Many have tens of millions in revenue, every year.
With cash like that coming in the door, there ought to be a path to breakeven!
I know we sound like a broken record, but investors big and small have told companies to cut burn for over a year now. Many did, making hard decisions to lay off staff.
Now, those startups are in a strong position.
Once they hit breakeven, they no longer need to raise money. If they decide to do so, it’s on their own terms.
The Punitive Funding Environment
But for startups that refused to adapt, the picture is grim. If they can raise money at all, the terms are often punitive.
Nearly 1 in 10 funding rounds now includes a liquidation preference above 1x, up from almost none a year ago. You can bet that figure is a lot higher at the late stage, given capital scarcity.
If a VC invests $50 million at a 3x liquidation preference, that means he gets back $150 million before anyone else gets anything. If the company exits for $150 million or less, he gets it all.
Nothing for founders, nothing for employees, nothing for early investors.
When employees find out about this, the best tend to leave. After all, their options may now be worth nothing.
What’s more, the company becomes hard to finance in the future. Take that cap table to the next investor, and they’re going to squint and say “What is this mess?”
Late Stage Outlook
Don’t expect the late stage funding market to ease up any time soon.
At the peak, the vast majority of capital came from crossover hedge funds. Those funds are largely out of the market, licking their wounds.
Meanwhile, VC’s are raising fewer new funds. This means they’ll have to dole out their existing capital more slowly.
Wrap-Up
Getting to profitability is tough. It can involve saying goodbye to great employees.
But it beats the alternatives.
A startup’s ultimate goal is to become an independent, public company.
This means it will have to get to profitability anyway. Public markets aren’t buying unprofitable tech these days.
No time like the present!
What are you seeing in the late stage market? Leave a comment and let us know!
If you enjoyed this post, subscribe for more like this!
More on tech:
Save Money on Stuff I Use:
This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.
More on Fundrise in this post.
If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!
I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!
I wrote a detailed review of Misfits here.
Use this link to sign up and you’ll save $15 on your first order.
Tremendous 
Leave a reply to The Trick I Stole from Benchmark | Tremendous Cancel reply