SAN FRANCISCO. For the first time in three years, funding for start-ups is being cut.
The numbers are harsh. Investment in US tech startups has fallen 23% over the past three months to $62.3 billion, the sharpest drop since 2019, according to data released Thursday by PitchBook, which tracks young companies. Worse, in the first six months of the year, initial sales and initial public offerings — the main ways these companies return money to investors — fell 88% to $49 billion from last year.
Recessions are rare in a startup ecosystem that has experienced over-growth for more than a decade, fueled by a booming economy, low interest rates, and people using more and more technology, from smartphones to apps to artificial intelligence. This surge has spawned familiar names like Airbnb and Instacart. Over the past ten daysQuarterly funding for high-growth start-ups fell by just seven times.
But as rising interest rates, inflation and the uncertainty surrounding the war in Ukraine clouded the global economy this year, young tech companies hit hard. And it heralds a difficult time for the tech industry, which relies on startups in Silicon Valley and beyond to power the next big engine of innovation and growth.
“We were in a long bull market,” said Kirsten Green, an investor in Forerunner Ventures, adding that the pullback was in part a reaction to this frenetic trading period, as well as macroeconomic uncertainty. “What we’re doing right now is calming the situation and removing some of the noise.”
The startup industry still has a lot of money and collapse is not inevitable. Investors continue to close deals, having funded 4,457 transactions in the last three months, up 4% from a year ago, according to PitchBook. Venture capital firms including Andreessen Horowitz and Sequoia Capital also continue to raise large new funds that could be deployed to young companies, raising $122 billion in liabilities this year, according to PitchBook.
The state of the stock market
The fall in the stock market this year has been painful. And it is still difficult to predict what the future holds for us.
Startups are also used to the boy who cried like a wolf. Over the past decade, various surges in the market have led to predictions that technology was in a bubble that is about to burst. Each time, technology recovered even stronger, and more and more money poured in.
However, the warning signs that all is not well have become more prominent in recent times.
Venture capitalists such as Sequoia Capital as well as Lightspeed Venture Partners, urged young firms to cut costs, save money and prepare for difficult times. In response, many startups have laid off employees and imposed a moratorium on hiring. Some companies, including payments startup Fast, home design company Modsy and travel startup WanderJaunt, have closed.
The pain has also affected young companies that have gone public over the past two years. Shares of former favorite startups like stock app Robin Hoodscooter startup Bird Global and a cryptocurrency exchange. Coinbase fell 86-95% below last year’s high. 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, said last month it was liquidating its assets.
Kyle Stanford, an analyst at PitchBook, said the difference this year was that there were no huge checks and a 2021 value spike. “It was unstable,” he said.
According to Mark Goldberg, an investor at Index Ventures, the startup market has now reached a kind of dead end, especially for the largest and most mature companies, resulting in a lack of new funding. Many startup founders these days don’t want to raise money at a price that values their company lower than it once did, and investors don’t want to pay last year’s higher prices, he says. The result is stagnation.
“He’s pretty frozen,” Mr. Goldberg said.
In addition, so many startups raised huge sums of money during the recent boom that few needed to raise money this year, he said. The situation may change next year, when some companies start to run out of cash. “At some point the deadlock will break,” he said.
David Spreng, an investor in Runway Growth Capital, a venture capital firm, said he saw a gap between investors and startup executives depending on the state of the market.
“Virtually every venture capitalist is sounding the alarm,” he said. But, he added, “the management teams we talk to seem to think everything will be fine, don’t worry.”
One thing he has seen in every company, he says, is a hiring freeze. “When we start to see companies falling short of their revenue targets, it’s time to start worrying a bit,” he said.
However, the huge amounts of capital accumulated by venture capitalists to support new start-ups has given the industry confidence that it will avoid a major crash.
“When the faucet reopens, venture capital will be set to go back to putting a lot of capital back into the work,” Mr. Stanford said. “Unless the overall economic climate worsens.”