Startup Funding Keeps Rising: Is This Sustainable?

The past two decades have been very rewarding for startups—especially in the tech sector. The average size of series A funding in 2010 was just $4.9 million, but by 2017, that number had ballooned to $12.1 million. Similarly, cumulative seed capital averaged just $1.4 million in 2010, but is now closer to $6.3 million. Venture capital overall reached an all-time high in 2017, peaking at $84.2 billion in raised funds over the course of the year. Compare that to just $29.4 billion in 2006.

It seems we’re on a course of consistent increases, with each year including more total funding and a higher average funding size. But is this path of growth sustainable for the indefinite future?

Why Does Funding Keep Increasing?

Let’s start by examining one crucial question: why does startup funding keep increasing?

There are several factors at play here:

• Number and diversity of available businesses. It’s easier to start a business than ever before. Anyone with a solid idea for an app, a website, or a new device can draft a business plan using online resources and start marketing their idea to prospective investors. This has dramatically grown the economic environment for entrepreneurs, inventors, and investors; venture capitalists have more opportunities for investment, and more professionals have a chance to turn their business ideas into a reality.
• Tech rock stars. In the past decade or so, we’ve also seen the emergence of tech rock stars in the form of unicorns—massive, game-changing startups valued at $1 billion or more. Investors have learned to more optimistically calculate a tech company’s potential, and as a result, the deals are getting bigger and more competitive. When even a fraction of your investment deals get propelled to that tier of value, your average deal and total funding statistics are going to climb.
• A booming market. We’ve also had the pleasure of a booming market—the longest bull market in history, by some estimates. It’s been nearly a decade of consistent gains, high economic growth, and low unemployment, and investors have grown both optimistic and greedy as a result. They’re more willing to invest in risky endeavors because they’ve had such success in the past several years, and they’re excited to invest more in “sure thing” startups in an effort to chase gains in the bull market even further.
• Exponential opportunities. Investors are also thrilled at the prospect of chasing exponential gains. Tech giants like Amazon, Netflix, and even Uber have shown that a company with modest beginnings and a unique idea can quickly become a billion-dollar-plus juggernaut. This incentivizes investors to spread the wealth to more promising ideas, since the potential for growth is so enticing.

Sustainability Issues

Many of these factors have the potential to persist, driving funding statistics even higher in the years to come. But there are some sustainability issues that could stifle this growth, ultimately leading to stagnation—or even declining rates of funding.

• Disproportionate funding. First, there’s the issue of disproportionate funding. Venture capitalists aren’t distributing funding to every business that makes a pitch to them; instead, they tend to funnel their funding to only the companies that have the greatest chance of success. As a result, tech unicorns tend to attract tons of funding, pushing their valuations illogically high at times, and companies with a higher risk profile tend to be completely ignored. This is problematic because even a single overvalued failure can result in major losses by VCs, and prevents some entrepreneurial ventures from ever getting a chance at success.
• A looming tech bubble. Some economists have speculated that the tech sector, in general, is seriously overvalued. Stock prices are far higher than they should be, which suggests that a new tech bubble may be forming. If that bubble bursts and stock prices plummet, it could lead to much higher investor pessimism, and much greater reluctance to fund startups as liberally as they have been.
• Tech progression slowdown. We should also consider the fact that technology may not be progressing exponentially anymore. Expectations of consumers and investors alike are sky-high, demanding new innovations at every turn, but with the end of Moore’s Law and stabilization across the industry, we shouldn’t expect continuous growth in the number and diversity of startups—even if it’s relatively easy to start a business from scratch.

It’s not certain whether the increasing rates of startup funding are going to continue indefinitely, or whether they’ll fall off at some point. There are simply too many influencing factors and too many unpredictable variables to make a clean prediction. Look to economic conditions in the coming years, and changes in how startups are funded and managed for a better understanding of what’s to come in the near future.