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U.S. VC funding cools from 2021 record as investors keep their powder dry

Saturday, January 7, 2023
U.S. VC funding cools from 2021 record as investors keep their powder dry © Reuters. FILE PHOTO: U.S. Dollar banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration

By Krystal Hu

(Reuters) - Funding for U.S. startups fell by one-third from their peak in 2021, according to PitchBook data released on Friday, despite record amounts of capital raised by new and existing venture funds.

Private venture-backed companies raised a total of $238.3 billion last year, 31% lower than the record of $344.7 billion in 2021, the data showed.

Despite being a challenging year for emerging fund managers, 2022 saw $162.6 billion closed across 769 funds, setting an annual record for capital raised and marking venture capital's rise as an asset class for money managers.

Sitting on a record pile of unused funds, investors are slowing deployment of the capital to private tech companies that are largely unprofitable amid a year of rising interest rates, geopolitical risks and public market volatility.

"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."

Public market performance continues to weigh on private market investor sentiment. Initial public offerings remain scarce, limiting exit options for VC investors. Revenue multiples for tech darlings such as enterprise software firms dropped to about 5.7 times revenue, versus 17 times one year ago, according to BVP Nasdaq Emerging Cloud Index.

While angel and seed-stage deal activity remains relatively resilient, growth and late stage firms now need 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.

Cybersecurity startup Snky raised $196 million in funding with a 12% drop in valuation, at $7.4 billion, in December. TripActions, a corporate travel and expense company took $150 million structured capital from Coatue Management.

"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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08-02-2023 00:02:54 (UTC+7)

EUR/USD

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EUR/USD

1.0704

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 EUR/USD1.0704Sell
 GBP/USD1.2011Sell
 USD/JPY131.38↑ Buy
 AUD/USD0.6925↑ Sell
 USD/CAD1.3440↑ Buy
 EUR/JPY140.60↑ Buy
 EUR/CHF0.9892↑ Buy
 Gold1,887.30↑ Sell
 Silver22.293↑ Sell
 Copper4.0477Neutral
 Crude Oil WTI76.72Sell
 Brent Oil83.39Neutral
 Natural Gas2.546↑ Buy
 US Coffee C176.83↑ Buy
 Euro Stoxx 504,209.31↑ Buy
 S&P 5004,115.80Sell
 DAX15,320.88↑ Buy
 FTSE 1007,863.80↑ Buy
 Hang Seng21,298.70↑ Sell
 Small Cap 20001,946.90↑ Sell
 IBEX 359,172.40↑ Buy
 BASF52.950Neutral
 Bayer58.95↑ Sell
 Allianz219.40↑ Buy
 Adidas153.08Neutral
 Lufthansa9.653↑ Buy
 Siemens AG140.86Buy
 Deutsche Bank AG11.530↑ Buy
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