The Current Funding Environment for Early-Stage Companies

It’s been widely reported that funding for startups has gotten very tight in the last year, and the environment in Michigan is no different.  Angel investment was down across Michigan in 2022, with deal count declining by 30% from 2021, and angel dollars invested down 33% from 2021.  This was consistent with national trends in early-stage funding, with venture capital deals down 14% from 2021 and dollars invested declining by 35%. 

This trend has continued into 2023.  Venture funding in Q1 2023 was down 53% from Q1 2022 (and down 63% if you take out the $10B investment into OpenAI and $6.5B round into Stripe). Seed funding, as a subset of total funding, was down 44% in Q1 versus the first quarter last year, so less dramatic, but still significant.

None of this is a surprise given the macroeconomic headwinds last year, including inflation, rising interest rates, public market fluctuations, and geopolitical tensions.  In addition, total exit value among angel and venture-backed companies in 2022 was down 90%.

To be fair, 2021 was a big rebound year coming out of the pandemic that may have included pent-up supply and demand, which drove angel deals in MI up by 10% from 2020 and angel dollars invested up nearly 40%, for example.  And there are some positives with inflation showing some early signs of easing and with the federal government preventing a more severe fallout from the Silicon Valley Bank failure. 

But there are some prognosticators projecting a wave of startup failures in later 2023 and 2024: as companies run out of the cash they raised in 2022, they may find it harder to raise another round later this year or next. 

So, we’ll reiterate to startups, a quote sometimes attributed to Maya Angelou: “Hope for the best and be prepared for the worst,” in this environment.  Here are a few common refrains in that regard:     

• If possible, raise money now, and more than you think you’ll need, as the tighter funding environment could last for a while.
• Reduce your burn rate, and then reduce it some more, to extend your runway to get through this period, until there are obvious signs of improvement.
• Focus on getting your unit economics right and possibly aim toward profitability instead of trying to grow too rapidly. 
• Be one of the companies who survive this funding downturn, and then take advantage of the potentially less crowded market later on.   

All that said, there is still a record amount of “dry powder” (early-stage capital in investors’ coffers) in the market.  So good companies will still get funded.  But it will likely happen at a slower pace in 2023-24.

See our prior blogs on fundraising basics, pitch decks, pre-seed funding, and seed funding to learn more about the fundraising process. 

To help you with your investor search, here are some of the most active early-stage investors in the Midwest over the last 12 months:

You should also check out the MVCA Landscape Guide to find more investors in Michigan and the Midwest.

Ann Arbor SPARK

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