U.S. VC funding slows from 2021 peak as investors hold back
- ByStartupStory | January 7, 2023
6 January (Reuters) Despite unprecedented levels of capital being received by new and existing venture funds, funding for U.S. startups decreased by one-third from its peak in 2021, according to PitchBook data released on Friday.
According to the data, private venture-backed businesses raised $238.3 billion overall last year, 31% less than the high of $344.7 billion in 2021.
Despite being a difficult year for new fund managers, 2022 saw the closing of $162.6 billion across 769 funds, breaking the previous record for capital raised annually and heralding the emergence of venture capital as an asset class for money managers.
In a year of rising interest rates, geopolitical concerns, and public market volatility, investors are slowly deploying the capital to private tech companies that are generally unprofitable while holding onto a record amount of unspent money.
“VCs didn’t want to price a falling knives situation so things came to a near-screeching halt,” said Pegah Ebrahimi, co-founder at FPV Ventures, a $450 million new fund launched in 2022. “No one wants to lean in when they aren’t sure how far the bottom is.”
Investor morale in the private market is still being weighed down by public market results. Initial public offerings are still in short supply, which limits VC investors’ alternatives for exit. According to the BVP Nasdaq Emerging Cloud Index, revenue multiples for tech darlings such enterprise software companies have decreased to around 5.7 times sales from 17 times a year ago.
Growth and late stage firms must now decide whether to choose a “down round,” which means target firms are valued less than their last round, or take structured financing with debt-like features that offer investors more downside protections. While angel and seed-stage deal activity remains relatively resilient.
Snky, a startup in cybersecurity, raised $196 million in fundraising in December after seeing its valuation fall by 12% to $7.4 billion. Coatue Management provided $150 million in structured financing to TripActions, a business travel and expenditure management company.
“I think companies trying to raise again are faced with a pretty rude awakening,” said Larry Aschebrook, Managing Partner at G Squared. “Investors are looking for more, and for the first time in recent years, that control of pricings is turned back over to the managers.”
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