San Diego’s startup companies are facing challenges as they seek to raise additional capital. This trend is being felt across all stages of the startup lifecycle, but it appears to be particularly tough for mid- to later-stage startups. The rules of the game have changed, and startup entrepreneurs are now finding it difficult to raise venture capital. Investors are scrutinizing the details of a company’s spending, such as revenue growth, profitability, and long-term durability. They are asking tough questions, which is different when compared to a couple of years ago where there was a lot of FOMO on the investor side.
Startups across the country are facing similar challenges in the funding landscape as they seek to raise additional capital. According to data from the Venture Monitor report from research firm PitchBook and the National Venture Capital Association, $588 million in venture capital flowed into young San Diego County companies in the first quarter, down 30 percent from the same quarter last year. This amount is equivalent to startup funding in the first quarter of 2019, before the pandemic brought about the boom.
During the pandemic funding boom, valuations often got overheated, and the focus was mostly on growth, especially revenue growth, rather than earnings. Now, the triage is getting closer to ending, choosing who survives and who doesn’t. Investors are saying to startups get to profitability before seeking additional funding. As a result, some venture firms are opting for insider rounds for their portfolio companies, providing bridge funding to help their startups get to a point where sales and earnings validate the valuations.
One strategic finance software startup in San Diego, Mosaic, recently raised $26 million in a third round of funding, led by new backer OMERS Ventures, with participation from existing investors, Founders Fund, General Catalyst, and Friends and Family Capital. However, the funding came after Mosaic took steps to become more efficient, such as trimming down its headcount by 15 workers over the past year. Many venture capital-backed companies are not profitable, and there are not a lot of deals getting done. Therefore, it is even tougher when so many folks are actively trying to raise money.
Overall, startups in San Diego and across the country are facing challenges in the funding landscape. The rules of the game have changed, and investors are asking tough questions before investing in a startup. Companies seeking additional capital need to showcase massive potential. Investors are no longer interested in just revenue growth; they want to see profitability before giving out funds. Startups that survive this funding crunch will be those that can provide accurate answers to investors’ questions and prove that they’re on the path to profitability.
