SAN FRANCISCO — For the first time in three years, seed funding is dropping.
The numbers are raw. Investment in U.S. tech start-ups plunged 23% in the past three months to $62.3 billion, the biggest drop since 2019, according to figures released Thursday by PitchBook, which tracks start-ups. Worse still, in the first six months of the year, startup sales and IPOs — the main ways these companies return money to investors — fell 88% to $49 billion. , compared to a year ago.
Downturns are rare in the start-up ecosystem, which has seen more than a decade of outsized growth fueled by a booming economy, low interest rates and people increasingly using technology, smartphones to apps and artificial intelligence. This push has produced now household names such as Airbnb and Instacart. Over the past decade, quarterly funding for high-growth start-ups has only been reduced by a factor of seven.
But as rising interest rates, inflation and uncertainty stemming from the war in Ukraine have clouded the global economy this year, young tech companies have been hit. And it portends tough times for the tech industry, which is relying on startups in Silicon Valley and beyond to provide the next big engine of innovation and growth.
“We’ve been in a long bull market,” said Forerunner Ventures investor Kirsten Green, adding that the pullback was partly a reaction to this frantic period of trading, as well as macroeconomic uncertainty. “What we’re doing right now is calming things down and reducing some of the noise.”
The start-up industry still has a lot of money behind it, and no collapse is imminent. Investors continue to close deals, funding 4,457 deals in the past three months, up 4% from a year ago, according to PitchBook. Venture capital firms, including Andreessen Horowitz and Sequoia Capital, also continue to raise significant new funds that can be deployed in young companies, raising $122 billion in commitments so far this year, PitchBook said.
The state of the stock market
The decline in the stock market this year has been painful. And it remains difficult to predict what awaits us for the future.
Start-ups are also used to the boy who cried wolf. Over the past decade, various market hiccups have led to predictions that technology is in a bubble that will soon burst. Each time, the technology bounced back even stronger and more money poured in.
Even so, the warning signs that all is not well have recently become more prominent.
Venture capitalists, such as those at Sequoia Capital and Lightspeed Venture Partners, have warned start-ups to cut costs, conserve cash and prepare for tough times. In response, many start-ups have laid off workers and instituted hiring freezes. Some companies – including payment start-up Fast, home design company Modsy and travel start-up WanderJaunt – have shut down.
The pain has also reached young companies that have gone public in the past two years. Shares of former darling startups like stock market app Robinhood, scooter startup Bird Global and cryptocurrency exchange Coinbase have fallen 86% to 95% below their highs for the year last. Enjoy Technology, a retail startup that went public in October, filed for bankruptcy last week. Electric Last Mile Solutions, an electric vehicle startup that went public in June 2021, announced last month that it would liquidate its assets.
Kyle Stanford, an analyst at PitchBook, said the difference this year was that the huge checks and surge in valuations of 2021 weren’t happening. “These were not sustainable,” he said.
The start-up market has now hit something of a dead end – especially for larger, more mature companies – which has led to a lack of action in new funding, said Index investor Mark Goldberg. ventures. Many start-up founders don’t want to raise money these days at a price that values their business lower than it once was, while investors don’t want to pay the high prices of last year, did he declare. The result is stasis.
“It’s pretty much frozen,” Mr. Goldberg said.
Moreover, so many start-ups raised huge amounts of money during the recent boom period that few needed to fundraise this year, he said. That could change next year, when some companies start to run out of cash. “The blockage is going to break at some point,” he said.
David Spreng, an investor at Runway Growth Capital, a venture debt investment firm, said he’s seen a disconnect between investors and start-up executives over the state of the market.
“Almost all VCs are ringing the alarm bells,” he said. But, he added, “the management teams we talk to all seem to be thinking: everything will be fine, no worries.”
The one thing he has seen all companies do, he said, is freeze hiring. “When we start to see companies miss their revenue targets, it’s time to get a little worried,” he said.
Yet the huge stacks of capital venture capital firms have amassed to back new start-ups have given many in the industry confidence that it will avoid a major meltdown.
“When the tap comes back on, VC will be in place to put a lot of capital back to work,” Stanford said. “If the general economic climate does not worsen.”