Why venture capital funding is dwindling in the tech sector

Yahoo Finance tech reporter Allie Garfinkle details how tech sector investing from venture capitalist firms is falling amid hiring freezes and lay offs occurring in the tech space.

Video transcript

[MUSIC PLAYING]

DAVE BRIGGS: The NASDAQ is down nearly 30% year to date. Tech companies are laying off hundreds of employees. And now venture capital firms are holding back on funding. Yahoo Finance's Allie Garfinkle here to break down the trouble in tech. Allie, nice to see you. Why is the VC landscape in a bind right now?

ALLIE GARFINKLE: It's great to see you, too, Dave.

DAVE BRIGGS: Nice to see you.

ALLIE GARFINKLE: Yes.

DAVE BRIGGS: Good to have you in.

ALLIE GARFINKLE: It's good to see you in person. So the macroeconomic backdrop is kind of the place to start-- inflation, high gas prices, the war in Ukraine. It's all made VCs more cautious. I was at the Collision Conference in Toronto and talked to about half a dozen VCs. And they were all saying the exact same thing, which is the bar for investment has gone up. And part of the reason why is just the nature of the VC model, right? You have VCs who are, traditionally speaking, unicorn hunting. They're looking for massive returns.

The idea is that 10 companies fail, but one succeeds. And that 11th is Uber or it's Airbnb. And looking for these high growth companies, you have sort of a problem in an environment like this, which is, what do you do when no one's growing at the level that you've come to expect? And the answer is that in many cases, VCs retreat and wait. They pull back.

RACHELLE AKUFFO: And it does seem like we were spoiled for a while. It seemed like every two seconds, a new unicorn, and now everyone's getting a little bit more cautious. And then of course, you have the layoffs in terms of what that means and how they should be sort of thinking about what they invest in.

ALLIE GARFINKLE: Yeah, that's a great question, Rachelle. There's a connection between the VC landscape and layoffs-- I think, at least. It's a cycle, right? Raising money is so hard. And it's the margin for error startups get small. The macroeconomic environment makes it difficult for you to hit your metrics. And then VCs don't want to fund you. So it's sort of a cycle. And a lot of the time, companies will just be looking to survive in a situation like this.

For example, better.com, right? The startup famously has been doing round after round of layoffs. And that's reportedly affected as many as 5,000 employees. Now, if you look at their funding, their last funding was series D in 2020. And they've had a couple of secondary market funding moments since then. But for the most part, they've been losing money. And the money hasn't been coming in.

So there's a math problem developing, essentially. What do you do when your startup is running out of money? And the answer, a lot of the time, is, it's layoffs. And it applies to public companies, too, by the way. I think it's really important to know that the system incentivizes quick growth at all costs, in some cases.

DAVE BRIGGS: Are more layoffs ahead?

ALLIE GARFINKLE: It is entirely possible, Dave. We'll see what happens. I think if companies end up having to raise down rounds, it may pause-- it may prevent that from happening. But in the end, it is entirely possible layoffs are ahead, because private markets operate really differently, and you'd rather fail than raise a down round.

RACHELLE AKUFFO: Goodness. Tough times, indeed. Well, thank you so much. Allie Garfinkle there with us.