Venture capital funding for start-ups plummeted by more than half in the first quarter of 2023 compared with the year before.
The period saw a massive slowdown in the tech industry, as the number of new funding agreements fell to less than 3,000, a 55 percent decline and the lowest level in more than five years.
Sources of Capital Dry Up as Investors Become Cautious
The collapse of Silicon Valley Bank last month, which played a major role in financing or supporting nearly half of all venture-backed tech start-ups, worsened the already tight situation facing the industry.The failure of the bank sparked a wave of concern throughout the community as fears spread that it would slow the pace of investing for the foreseeable future and dry up available liquidity.
“The whole market is taking much more caution toward investment,” said Kyle Stanford, a venture capital analyst at PitchBook.
“It’s not going to be easy for companies to raise capital even if they’re growing at a pace they set in their last round.”
The tech industry has also suffered due to rising interest rates and a major downturn in the sector, which was marked by plunging market shares and thousands of layoffs.
Higher interest rates have also slammed the crypto industry, as demand for services that many start-ups were offering slowed down, contributing to financial difficulties.
The venture start-up boom was largely a result of years of near-zero interest rates, which had persisted since the financial crisis of 2008–09.
Pension funds, endowments, and other types of investments, which provided poor returns under low interest rates, forced investors to put their money into safe financial vehicles with the potential for higher profits, like venture capital.
The aftermath of the pandemic led to supply-chain chaos and skyrocketing inflation, forcing the Fed to raise rates once again.
A sustained period of higher interest rates may also change how institutional investors decide on which venture firms will receive capital and influence the types of firms they back at the expense of of those who fail to make their criteria.
Start-ups Expect to Lose Funding as Investors Look Elsewhere
As investors find it increasingly hard to make money by backing start-ups, funding to tech companies has begun to slow.Exit activity, which covers initial public offerings and sales to other companies, dropped to $71.4 billion in 2022, the first time that the annual amount fell under $100 billion in six years, said PitchBook.
Venture capital-backed companies recorded just $5.8 billion in exits during the first quarter, less than 1 percent of the record exit value generated in 2021.
The sharp slowdown in exits could become a challenge for more established companies in 2023, which will need additional cash, even after making cost-cutting measures, predicted Stanford.
“Companies are trying to lengthen their runways,” he said.
Stanford said that venture funds may be unable to support all of the new start-ups that need money to keep operating, as interest in the sector from nontraditional start-up investors like private equity firms and hedge funds has moved away.
Many start-ups are expected to shut down if the downturn lingers through 2024, said the report.
