Venture capitalists are funding fewer startups, especially at the earliest stages of a company’s life, according to new data from research firm PitchBook.
(Bloomberg) — Venture capitalists are funding fewer startups, especially at the earliest stages of a company’s life, according to new data from research firm PitchBook.
In the US, investors financed 3,011 startup funding deals last quarter, about a third fewer than a year ago. And they spent a lot less cash: $39.8 billion, down by nearly half from the same period last year. Take out the more than $6.5 billion investors spent on payments company Stripe, and the total looks even worse, said PitchBook analyst Kyle Stanford.
The biggest drop came in angel or seed deals, which is financing for startups usually still at the concept stage. In that category, there were half as many funding deals as there were a year earlier. Those early funding rounds — when young companies are either nurtured or starved — are generally considered to be critical to the health of the venture ecosystem.
But the lower deal numbers aren’t all bad news, Stanford said. In the heady days of the pandemic boom, there were “probably too many” startups raising money because the public markets can only support so many public offerings, he said. “Starting these companies slower is probably healthy.”
Funding for larger startups that are closer to the public markets wasn’t as hard-hit. In that category, investors funded 210 US deals in the quarter, up from 196 a year earlier. However, more did not mean better, Stanford said. Many of those deals were small extension rounds, used to allow the startups to raise more cash while keeping valuations higher than they would have been if the companies raised money in larger, traditional deals.
The numbers signal the continuation of a months-long slump for private tech companies. Last year, as high interest rates threw the industry into turmoil, startups laid off staff and cut valuations as VC funding fell. Now, even as public tech companies have staged a comeback on the stock market, private markets are still feeling the impact of the slump.
Globally, startups raised $87.4 billion, down from $152.9 billion a year earlier. The cash went to 10,571 deals, down from 12,696 a year earlier. PitchBook’s numbers don’t include the $10 billion funding round for OpenAI, a spokeswoman said, because it was a corporate investment that amounted to a near-majority stake.
One problem for private companies is that there are still relatively few major initial public offerings and big acquisitions. The value of exits — deals in which companies get acquired or go public — fell to $51.5 billion globally in the second quarter, PitchBook found. Most of that value was concentrated in Asia. In the US, the total value of exits was just $5.5 billion — largely because of a dour market for IPOs.
In better economic times, startups were focused on growth above all, but now investor sentiment has changed. “Investors are looking at that saying, ‘That’s not what I want to invest in,’” Stanford said. “They’re saying, ‘I want to invest in a company that has some semblance of a path to profitability.”
VCs themselves are also seeing a tighter fundraising climate. Venture capital firms raised just $33.3 billion in the US this year, on track for the lowest total since 2017. One bright spot was Asia, where venture funds raised money roughly on par with 2022.
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