Startup funding dries up as the year ends

Like the holidays and ice cream sales, startup investment is seasonal. Investors are most active at the beginning of the year and before summer, and activity drops of as the year comes to a close.

Intuitively, this makes sense. A new year ushers in new ideas and new enthusiasm. Startups will be looking for cash, and investors will be happy to provide it. But during the holiday season, both startups and angels are liable to slow down a little and reflect on the year’s progress. This pattern is illustrated by the graph below, with funding activity high in terms of deals executed and money handed out.

funding_by_month_2015
Click on the image to see the full size version.

But this year, the gentle drop-off at the end of the year seems to have turned into a nosedive. Only slightly more than half as much money was invested in November compared to October, and only a third as much as was invested in startups in January. Granted, November hasn’t quite come to a close – but with the Thanksgiving weekend in the United States and the beginning of the Christmas season globally, it’s unlikely the $3.5b deficit between November and October will be covered in the next three days.

So what’s going on? Is it the Black Tuesday of the startup market? Are investors jumping ship and leaving startups in favor of more established companies? Probably not. It helps to put on our nicest time-traveling shoes and expand our timeline a little. Let’s jump back to 2010 and see how things looked then.

funding_by_month_2010-2015

You can click on this image to see it in full size too.

Well, that nosedive certainly doesn’t look better. If anything, it does¬†look like Black Tuesday is back for round two. But something else becomes much more pronounced as well. See how much smoother the growth in startup investing was in 2010-2012 compared to recent years? See how 2013 onwards looks like that rollercoaster that makes you lose your lunch just by looking at it?

Startup investing has become much more volatile in recent years. Notice how the red line representing the number of funding rounds seems to be dropping off much faster than the blue line that represents the amount of money funded. This means that the average amount of money invested in each deal is increasing. Take Airbnb’s $1.5b round as an example. It would take a handful of these to drive a year’s numbers of to new levels.

While a more in-depth analysis would have to be done to confirm that investors are taking bigger risks and investing larger amounts of money consistently, the initial indications give a pretty clear picture of where startup investing might be heading. As investors become bolder and execute larger deals, tying up larger sums of cash in one place, they may wish there was a liquid secondary market for startups.

If only there was someone offering such a market…