After a banner 2021, VC funding has taken a serious hit, and this year’s continuing struggles proves it’s not just a momentary blip.
Global venture funding in Q2 2023 dropped to its lowest level since 2020, per CBInsights. Deal counts have continued to fall since 2022, reaching their lowest since 2016 in Q2 this year. In the US, funding totaled $31.3 billion, a 27% decrease quarter over quarter.
Retail funding has followed a similar trend, and Retail Brew spoke to three investors—who previously shared their insight into investment strategies and due diligence process for sustainable retail companies—about what they’re seeing in this tricky retail funding climate and how it’s impacted the deals they make and entrepreneur’s mindsets.
Disciplinary actions: Chuck Templeton, senior managing director at S2G Ventures (and who also founded OpenTable in 1998), has worked through a few rough patches in the economy, including the dot-com crash and 2008 financial crisis. He believes the financial crunch can have a silver lining.
“Constraints are a fantastic thing for entrepreneurs,” he said. “And when there’s a higher cost of capital to entrepreneurs, it really sharpens the focus.”
Over the past nine to 12 months, S2G Ventures has looked “a lot more aggressively,” at monthly burn rate, gross margin profile, and whether there’s a path to increasing that gross margin and reaching profitability, he said. As such, many of S2G Ventures’s portfolio companies, who once looked at their businesses more as a platform, working on several simultaneous projects, now have started to zero in on one.
“When I see a startup with multiple revenue lines—meaning that there’s multiple products they’re going to sell—it makes me nervous, because it’s hard to be successful at one product, let alone two, three, or four products when you’re a startup with very little resources,” Templeton said.
Particularly in the food industry, companies in areas like cell-cultivated meat are also figuring out if they can use existing infrastructure or third parties and not have to raise a ton of $$ to build a facility from scratch.
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Slow burn: Karla Mora, founder and managing partner at Alante Capital, said she’s seen deal flow slow, and fewer companies have been raising money over the last seven or eight months. Rounds themselves have also gotten much slower or have fallen apart “in the 11th hour,” she added.
This change of pace comes as companies aim to reach “better milestones” to support their valuations in the more difficult funding environment, when prior to this high valuations (which has led to many down rounds, something Mora said Alante has avoided) were more the norm.
With less $$ flowing into VCs, many institutional investors are pressing pause on investing in the space until next year, having less liquidity because brands aren’t raising and exiting as quickly, Mora noted: “It’s all very connected.”
She said that for Alante, this funding environment has changed “the amount of runway” it’s giving companies, i.e. making sure a company’s funding can last for two years instead of 18 months. It’s also participated in more bridge rounds open to only a select few strategic investors.
Down to business: Danielle Joseph, managing director at Closed Loop Venture Group, said that the sustainability-focused companies the fund invests in “should be resilient” to the tough economy because their main goal is to simplify supply chains or create new revenue streams through waste reduction.
However, while Closed Loop Venture Group has invested in direct-to-consumer businesses, in the current economic climate it’s “spending a lot more time” on opportunities within B2B (like Hyran, which uses AI for fashion supply-chain planning), Joseph told Retail Brew.
“We’ll invest anywhere where there is a quantifiable value proposition—often a financial value proposition—to whoever that customer is,” she said. “A lot of what we’re seeing right now is that those value propositions are strongest in the B2B market, but we’re still seeing it in some consumer cases.”