The latest venture capital data highlights an ongoing slowdown as interest rates remain high and expenses are throttled. We compared year-over-year numbers from Startup’s fundings list and spoke to investors to get a pulse on the state of startup investment activity.
There were just 18 funding deals through February and $246 million deployed, according to Startup’s recent fundings list that tracks investment raised by privately held Pacific Northwest tech startups. That’s down from 50 deals and $1.2 billion during the same period last year, a nearly 80% drop in deal value.
Nationally, venture-backed companies raised $29.3 billion across 1,245 deals through February, according to preliminary VC data provided by Ernst & Young. That’s down from 2,383 deals and nearly $56 billion during the same two-month period last year.
Some investors backing early-stage deals say they are making a similar amount of investments compared to 2022. But the frenetic pace and frothiness of years past has eased.
“Rounds are slower, valuations are lower, and the bar for traction is higher compared to the peak in 2021,” said Leslie Feinzaig, managing director at Seattle-based firm Graham & Walker.
Many startups raised money at a time when venture capitalists were deploying a record amount of capital. But now amid the larger tech sector slowdown, investors are raising expectations and pushing founders to cut costs — in the form of layoffs, for example — and focus on profitability.
Even founders who have plenty of cash are still stressed, said Jenny Fielding, co-founder and managing partner of New York-based The Fund, and a former Techstars managing director.
“All the bad news is hard to hide from and that’s putting a lot of pressure on everyone,” she said.
Kirby Winfield, founder and general partner of Seattle-based seed-stage firm Ascend, said the slowdown is having more of an impact on later-stage startups. He said more funding is going to “inside rounds” — raising cash from existing investors — to prop up valuations, or significant “down-rounds,” which are raised at a lower valuation than the previous round.
“Those who require more resources to move forward need to turn to their trusted investors for advice and, yes, capital,” noted Matt McIlwain, managing director at Madrona Venture Group. “Investors with substantial reserves and a long-term perspective are very helpful during difficult market conditions.”
The lack of giant fundings of at least $100 million is contributing to the financing slump. There were no such deals through February of this year in the Pacific Northwest, compared to four in the year-ago period for SeekOut, Highspot, Temporal and Fabric.
This continues a downward trend from Q4, when there were 61 mega-round deals compared to a high of 239 in Q4 2021, according to a report by EY.
In some ways, the latest data shows a recalibration after all-time highs for venture capital investing.
“Just as the public markets have adjusted, it is reasonable to expect that private markets will do the same,” McIlwain said. “It is just a slower process in the private markets and has been especially pronounced for later-stage companies relative to earlier-stage ones.”
Investors say they are telling founders to prioritize and focus.
“We’ve been advising early-stage entrepreneurs to really focus on their milestones, pay more attention to the size and purpose of the raise, and to run very tight fundraising processes,” Feinzaig said.
McIlwain noted that many great companies launch and land funding in tougher economic environments, and AI-related investment activity is active.
Sheila Gulati, managing director at Tola Capital, said she’s “incredibly excited by the companies we are seeing in the market right now and those on the horizon.” She also pointed to AI.
“The possibilities inherent in the advances driven by AI are endless and the startup ecosystem is poised to benefit immensely,” she said.
Here are the top five funding rounds in the Pacific Northwest so far in 2023: Temporal ($75 million), Dev Zero ($26 million), Sirion Labs ($25 million), Archway ($15 million), and Earth Finance ($14 million).