"The party is over and we all have hangovers," said Menlo Ventures partner Venky Ganesan, incoming chairman of the National Venture Capital Association.
The latest data from PitchBook show that VC investing in U.S. companies dipped to $9.3 billion in the first quarter of 2016, down from $17.6 billion in the fourth quarter. "There's significant uncertainty in the market right now and (we) would advise companies looking to raise capital to close quick and — while financing is available — maybe close on more capital than is necessary to be prudent in this environment," said PitchBook analyst Garrett Black.
With the IPO window slammed shut and the current turbulence in the public markets, raising tens of millions of dollars is a lot harder than even six months ago.
For some start-ups unable to rein in costs or raise more capital, investors predict turbulent times. "Some of them are not going to make it and when they don't make it they will cause a lot more pain than normal," said Ganesan.
This sentiment has been echoed by many investors and entrepreneurs.
"The rubber is meeting the road and errors are much more consequential when the capital is tighter, because you can't raise your way out (of a) problem anymore," said Ash Rust, co-founder and CEO of SendHub. SendHub is a Menlo Ventures portfolio company that came out of Silicon Valley incubator Y Combinator and raised $10 million in Series B funding in 2015.
Rust noted that in addition to liquidity becoming harder to come by, investors are getting more concerned about liquidation preferences, which are showing up in more and more deals. Liquidation preferences protect those investors so that if a start-up sells or liquidates, they are guaranteed a certain amount of money back — often one times their investment — before anyone else. Many companies are opting instead to take on debt. Expect more of that, said Rust.
