Nervous investors drive VC Funding for startups down 55%

Nervous investors drive VC Funding for startups down 55%

Venture capital funding to startups plummeted by more than half in the first quarter from the year before, a stark indication of the toll that a slowdown in the tech industry has taken on young companies.

US startups raised $37 billion from venture capitalists in the first quarter of this year, the lowest amount in 13 consecutive quarters, according to data from research firm PitchBook and the National Venture Capital Association. Investors have reduced both the size and number of checks they write. The first quarter marked the lowest number of deals, fewer than 3,000, in more than five years.

“The whole market is taking much more caution toward investment,” said Kyle Stanford, a venture capital analyst at PitchBook. “It’s not going to be easy for companies to raise capital even if they’re growing at a pace they set in their last round.”

The sudden collapse last month of Silicon Valley Bank, an industry institution that funded or provided services to nearly half of venture backed startups and many venture firms, sent a fresh wave of concern through the community that may have slowed its pace of investing for years to come. The industry has struggled under rising interest rates and a continued downturn, marked by sinking valuations and thousands of layoffs.

Funding to tech companies has slowed at the same time that investors have found it harder to make money by backing startups. Exit activity, comprising initial public offerings and sales to other companies, dropped to $71.4 billion in 2022, the first instance of a dip below $100 billion in six years, the PitchBook data found.

Stanford said he expects the sharp slowdown in exits to pose challenges for more mature companies this year, which will need additional cash, even after cost-cutting measures such as layoffs. “Companies are trying to lengthen their runways,” he said. Venture firms may not be able to support all the unicorn startups that need money to keep operating, he said, particularly as interest in the sector has cooled from nontraditional startup investors such as private equity firms and hedge funds.

Over the next year, some startups could struggle or even shut down if the downturn lingers.  Andrea Lamari, general partner at Manhattan Venture Partners, said the industry is closely watching the larger economy and its impact on tech. “There has not been this level of uncertainty in nearly a decade surrounding what the macro environment impact will be on startups,” she said. “It’s as if everyone’s waiting for the next shoe to drop.”