It will have escaped few that when it comes to fundraising, the days of 2021 are now a distant memory. But how bad is it out there in the world of VC? And what do VCs really think about founders and the companies they are trying to persuade them to invest in?
Sifted surveyed over 100 VCs to find out.
Is the fundraising environment getting better or worse?
Just over half of respondents to our survey said that they invest mainly at pre-seed and seed stage, with the remaining half split between Series A (27.3%), angel (10.9%) and Series B+ (10%). Over 90% are based in Europe, with a tiny fraction based in the US and Asia.
When it comes to the fundraising environment, VCs were split. 43.6% of VCs said that they expected more companies to raise in the next six months compared to the last (9.1% said significantly more) but 43.7% said the landscape would either remain unchanged or get worse.
Likewise, only 34.5% expected to make more investments in the next six months, while 40.9% expected the amount to be unchanged and 17.3% to make fewer.
VCs are slightly more optimistic when it comes to mergers and acquisitions of VC-backed companies, with 51.8% expecting them to increase and 22.7% to remain the same. Only around 20% of respondents believe that M&A will decrease or significantly decrease in the next six months.
Who holds the cards: founders or VCs?
Is the environment more friendly to founders or VCs right now? Well, VCs resoundingly say… VCs.
Asked to rank the landscape out of ten, with one being the most founder-friendly and ten the most VC-friendly, over half of respondents answered seven or eight, with a further quarter (28.5%) giving nine or ten as an answer. (GRAPH)
How big are seed rounds and valuations right now?
When it comes to the median size of rounds for seed-stage companies in the second half of 2023, VCs’ answers vary wildly. But the average of the 75 answers we received put the actual size at $3.5m.
The status quo is the new norm — 2021 valuations and cash won’t be coming back anytime soon
And how has the situation for valuations changed compared to six months ago? Again, respondents were not that optimistic. A total of 63.6% said valuations were lower compared to six months ago and a further 29.9% said they were unchanged.
A tiny 6.5% — just seven respondents — said valuations were higher.
What are VCs doing with themselves during these times of uncertainty?
We asked VCs what they were spending most of their time on.
Some 41% of respondents said they were making new investments. A further 34.3% said they were supporting new portfolio companies and 18% said fundraising.
Just 5.7% of VCs are returning cash to LPs and only one respondent out of over 100 said they were hiring.
Over half (53.7%) of VCs said it was a bad time to be trying to raise money, with a further quarter non-committal (25.9%) and 13.9% saying the situation was very bad. There were a few optimists, with seven respondents saying the situation was good.
Nearly half of those VCs polled expected it to take between 18 and 24 months to raise their next fund, with a further 30.9% saying it would take a year and 8.2% more than two years. Just 14.4% believed they could raise within a year.
What are founders not getting?
So what do VCs really think about founders? We asked our respondents what the biggest source of misunderstanding was on the part of founders right now.
More than one respondent said it was a myth that there was a lot of dry powder — or money waiting to be invested. While LPs have committed money to GPs, they were not instructing them to actually spend it. As a result, valuations at all stages were going to be pressed, they said.
“Founders starting new companies have been believing the 2020-21 boom to be the normal,” they said. And it isn’t. Others said that founders failed to understand that high interest rates could be around for a long time and that, actually, the market may never come back.
“The status quo is the new norm — 2021 valuations and cash won't be coming back anytime soon,” one said.
A lot of the criticism focused on the unrealistic demands of founders when it comes to fundraising: “Founders still live in Lalaland and think a $12m post-money for a pre-seed is normal when at $15m you can get companies with traction,” one VC wrote.
Another said that founders needed to remember that VCs “are struggling to fundraise too”.
One of our respondents said that founders lacked “a functional business plan” while another said the greatest misunderstanding was that “there is a difference between being an AI company and using the ChatGPT API”.
But others were more positive.
“The funding environment is much better than founders think. VCs are desperate to invest. So, if you are a good company with decent (not outstanding) metrics, you still raise a good round. It’s only very tough for late-stage or underperforming companies,” one said.