Start-up financing has fallen the most since 2019

SAN FRANCISCO — Start-up funding falls for the first time in three years.

The numbers are grim. Investments in US tech startups fell 23 percent in the past three months to $62.3 billion, the sharpest drop since 2019, according to figures released Thursday by PitchBook, which tracks young companies. Worse, in the first six months of the year, start-up sales and IPOs — the primary ways these companies return money to investors — fell 88 percent, to $49 billion, from a year ago.

The declines are a rarity in the startup ecosystem, which has seen more than a decade of outsized growth fueled by a booming economy, low interest rates and people increasingly using technology, from smartphones to apps to artificial intelligence. That increase has now produced well-known names such as Airbnb and Instacart. In the past decade, quarterly funding for high-growth start-ups fell just seven times.

But as rising interest rates, inflation and uncertainty from the war in Ukraine have dampened the global economy this year, young tech companies have been hit. And that spells out a tough time for the tech industry, which relies on startups in Silicon Valley and beyond to deliver the next major innovation and growth engine.

“We’re in a long bull market,” said Kirsten Green, an investor at Forerunner Ventures, adding that the slump was partly a response to that frenzied deal-making period, as well as macroeconomic uncertainty. “What we’re doing now is calming things down and taking some of the noise out.”

The startup industry still has a lot of money behind it and a collapse is not imminent. Investors continue to close deals and fund 4,457 transactions in the past three months, up 4 percent from a year ago, according to PitchBook. Venture capital firms, including Andreessen Horowitz and Sequoia Capital, are also still raising large new funds to leverage in early stage companies, collecting $122 billion in pledges so far this year, according to PitchBook.

Start-ups are also used to the boy the wolf howled. Over the past decade, several market bursts have led to predictions that technology was in a bubble that would soon burst. Each time, the technology bounced back even more strongly and more money poured in.

Still, the warning signs that all is not well have become more prominent lately.

Venture capitalists, such as those at Sequoia Capital and Lightspeed Venture Partners, have been warning young companies to cut costs, save money and prepare for tough times. In response, many start-ups have laid off workers and imposed layoffs. Some businesses, including the payment startup Fast, the home design company Modsy, and the travel startup WanderJaunt, have closed.

The pain has also reached young companies that have gone public in the past two years. Shares of one-time startup darlings like stock app Robinhood, scooter startup Bird Global and cryptocurrency exchange Coinbase are down between 86 and 95 percent below their last year highs. Enjoy Technology, a retail start-up that went public in October, filed for bankruptcy last week. Electric Last Mile Solutions, an electric vehicle start-up that went public in June 2021, said last month it would liquidate its assets.

Kyle Stanford, an analyst at PitchBook, said the difference this year was that the huge checks and soaring valuations of 2021 didn’t happen. “They were untenable,” he said.

The start-up market has now found itself in a sort of stalemate — especially for the largest and most mature companies — which has led to a lack of action in new funding, said Mark Goldberg, an investor at Index Ventures. Many startup founders today don’t want to raise money at a price that values ​​their company lower than it once was, while investors don’t want to pay last year’s high prices, he said. The result is standstill.

“It’s pretty much frozen,” Mr. Goldberg said.

In addition, so many start-ups have accumulated huge piles of money during the recent boom that few have had to raise money this year, he said. That could change next year, when some companies are running out of money. “The blockade will break at some point,” he said.

David Spreng, an investor at Runway Growth Capital, a venture capital firm, said he had seen a split between investors and start-up executives over the state of the market.

“Almost every VC is ringing alarm bells,” he said. But, he added, “the management teams we talk to, they all seem to be thinking, it’ll be okay, don’t worry.”

The one thing he’s seen every company do, he said, is freeze hiring. “If we start to see companies miss out on their revenue targets, it’s time to get a little concerned,” he said.

Still, the massive amounts of capital venture capital firms have amassed to support new start-ups have given many in the industry confidence that it will prevent a major collapse.

“When the tap opens again, VC will be set up to get a lot of capital back to work,” said Mr Stanford. “If the broader economic environment doesn’t worsen.”