AI Boom Masks Fundraising Struggles for Non-AI Startups

Venture Capital Shifts Focus: Growth vs. Cost-Cutting

Tom Loverro, a general partner at IVP, recently indicated that the period of economic decline following the pandemic has ended. He suggests that businesses which have successfully navigated this period should now concentrate on expansion rather than further reductions in expenditure.

Financing Challenges Persist for Many

Despite this outlook, Brian Hirsch, co-founder of Tribeca Venture Partners, estimates that thousands of companies continue to struggle with securing subsequent funding rounds at desired valuations, or even maintaining operational viability.

Tribeca Ventures' Unique Strategy

Tribeca Venture Partners, established 13 years ago, employs a distinct late-stage investment approach. Unlike traditional growth funds, they focus on companies compelled to seek capital at a valuation equal to or less than their previous one.

Hirsch explained to TechCrunch that in numerous instances, current investors are prepared to provide additional funding, but require an independent assessment of the deal's value, a role Tribeca Ventures fulfills.

AI Dominates Venture Capital Interest

Currently, venture capitalists are demonstrating considerable enthusiasm for backing companies involved in artificial intelligence, often at very high valuations. However, Hirsch notes that all other sectors are experiencing significant difficulties.

A Widening Gap in Valuations

Recent valuation data from Carta vividly illustrates this divergence within the venture capital landscape. An analysis of almost 2,000 software deals completed this year revealed a substantial disparity in valuations.

The lowest 10% of Series B deals were valued at just $40 million, while the top 10% of companies at the same stage reached valuations approaching $1 billion.

Series D Valuations Show Similar Discrepancies

This valuation spread was even more pronounced for Series D funding rounds, ranging from $27 million to $5.2 billion.

AI Companies Lead the Way

Companies at the higher end of these valuation ranges are overwhelmingly focused on AI technologies. Examples include ElevenLabs, which secured an $80 million Series B round at a $920 million pre-money valuation, and Cohere, which completed its Series D at a $5 billion pre-money valuation.

A Difficult Landscape for Non-AI Startups

The fundraising environment is markedly different for startups not involved in artificial intelligence, even those that raised capital after the period of exceptionally low interest rates (ZIRP) concluded.

Challenges Securing Series B Funding

Companies that completed a Series A funding round 18 months ago are now encountering obstacles in obtaining Series B funding, even with respectable revenue growth, according to Hirsch.

Feeling Excluded from Investment

Hirsch suggests that founders of non-GenAI startups may feel overlooked, possessing a viable business model but lacking investor interest.

Decline in Series B Success Rates

Carta’s data confirms this trend, showing that only 9% of Series A companies have successfully secured Series B funding within two years, a considerable decrease from the previous rate of 25%.

Tribeca Ventures Facilitates Down Rounds

Tribeca Ventures is utilizing its growth fund to assist in pricing down rounds for more established startups, specifically those generating revenues of $20 million or more.

Valuations Remain Elevated

These startups are generally experiencing reasonable growth, but their valuations are currently too high relative to prevailing market conditions.

Continued Market Correction Expected

“We are still undergoing a correction process,” Hirsch stated. “We anticipate at least another two years of market stabilization and adjustment.”