It’s not a great time for startups
The job market is still going strong. The latest hiring data from ADP shows private employers added 184,000 jobs last month, the biggest gain since July. Median wages grew by just over 5%, and by 10% for those who changed jobs. We’ll get the official jobs numbers from the Labor Department on Friday.
One of the many economic engines behind a healthy job market is entrepreneurship, and the startups that bring new ideas into the world and put people to work. But right now, it’s not a great time for that whole ecosystem. Pitchbook says venture capital investments fell in the first quarter of this year, and that’s after the worst year for startup funding since 2019.
Vivas Kumar is CEO of a startup called Mitra Chem.
“We’re working on the chemicals that go inside the batteries that power electric vehicles,” said Kumar.
Now, a startup that hopes to supply America’s electric car fleet has a lot of scaling up to do, and that takes a lot of money. So last year Kumar needed to raise $60 million.
“When we went out and pitched the venture capital firms it became very clear to us very quickly that they were not going to be in a position to support our current round,” he said.
Kumar’s company was not alone.
“It’s been really hard,” said Kaidi Gao, a VC analyst at PitchBook. The number of new venture capital funds fell by 60% between 2022 and 2023. The amount of money they invested in startups fell by a third. That was about the same time the Fed started raising interest rates, and that’s not a coincidence.
“When the interest rate was held so high, from an investor perspective, you can allocate your capital and put it into something that’s really safe, say treasury bonds,” she said.
When the safe bets look so good, betting on a startup doesn’t. Venture funds themselves have had a hard time raising money, Gao says, for another reason: they haven’t been able to cash out previous investments as much.
“Large exits have not been happening,” she said.
Exits — that’s the dazzling IPO or the getting bought by Google — it’s often the pot of gold at the end of the startup rainbow. Those have slowed down the past couple years, and so a lot of investor money has been locked up in companies waiting for their big moment.
“I wouldn’t say a vicious cycle but that’s where the cycle, the whole difficulty is coming from,” she said.
Luckily for Vivas Kumar at Mitra Chem, he found a way around the venture capital slowdown. He went to his future customers, including General Motors, and he raised his $60 million. Many other startups haven’t been as lucky.
“So much of what dictates business success is just timing, whether markets are ready to accept. There are plenty of great ideas out there that just haven’t seen their time yet because of the funding slowdown,” said Kumar.
When the market recovers, he says you can bet those ideas will reemerge.
Stories You Might Like
There’s a lot happening in the world. Through it all, Marketplace is here for you.
You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible.
Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.
