VC Funding for Startups Drops 55% Due to Nervous Investors

It has been 13 consecutive quarters now that venture capital money has been allocated to US startups. 

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This is a stark indication of how the slowdown in the tech industry has taken its toll on young companies, as venture capital funding to them to startups plunged by more than half in the first quarter compared with the same period last year. 

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In the first quarter of this year, US startups raised 37 billion from venture capitalists, a record amount, according to the National Venture Capital Association and PitchBook, which research firm tracks money raised by startups every quarter. Both the size of the checks that investors write as well as the number of them has been reduced. The number of deals in the first quarter was the lowest in more than five years, with fewer than 3,000 transactions being completed. 

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A venture capital analyst at PitchBook says that the market as a whole is taking a more cautious approach to investment. “Many companies will have a hard time raising capital to keep up with their growth rate, even if they're growing at the same rate as they did in their last round of funding," said Stanford.

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Almost half of the venture-backed startups and many venture firms received funding or services from Silicon Valley Bank, which collapsed last month. It caused a fresh wave of concerns in the community that may have slowed its investment pace for years to come. There have been thousands of layoffs and sinking valuations in the sector due to rising interest rates and a continuing downturn.

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At the same time that tech companies have slowed funding, investors are finding it more difficult to profit from backed startups. A drop below $100 billion in exits, including initial public offerings and sales to other companies, was reported in the PitchBook data in 2022, representing the first time in six years that exit activity fell below $100 billion.

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Despite cost-cutting measures such as layoffs, Stanford expects the sharp slowdown in exits to pose challenges for more mature companies this year, who need additional cash. In his view, companies are trying to extend their runways. A growing number of unicorn startups need money to keep running, he said, but venture firms may not be able to support all of them. As nontraditional investors, such as private equity firms and hedge funds, have cooled interest in the sector, venture firms may not be able to support all unicorn startups.

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As long as the downturn lasts, some startups could struggle or even close down. Manhattan Venture Partners' general partner Andrea Lamari said that tech is closely watching the economy. “It's as if everyone is waiting for the next shoe to drop,” she said, regarding the macro-environment impact on startups. “There has never been such uncertainty in nearly a decade.”

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