Venture Spending Drops by Almost Half in US

Times are tough for early-stage startups, suffering a drastic drop in venture capital spending.

American investors backed 3,011 startup deals in the second quarter of 2023, a third fewer from the same period in 2022, Bloomberg News reported Thursday (July 6), citing Pitchbook data.

Those venture capital (VC) firms also spent less: just shy of $40 billion, a number that’s close to half of what they spent last year. The largest drop happened in angel or seed deals, for startups still in the concept phase.

However, Pitchbook analyst Kyle Stanford argued the lower numbers weren’t necessarily a bad thing. During the pandemic, he said, there were “probably too many” startups raising funds, as the markets can only support so many public listings.

“Starting these companies slower is probably healthy,” Stanford added.

Larger startups that are closer to going public fared slightly better, with investors funding 210 deals in the U.S. during the second quarter, compared to 196 in Q2 of 2022. But Stanford noted that many of these deals were smaller extension rounds designed to raise cash while keeping valuations higher than if the firms had carried out bigger deals.

This news follows weeks of reports about startups hurting for new funding amid a tough macroeconomic climate.

The first three months of the year saw a similar situation, as PYMNTS has written: The amount of venture capital raised by American startups plunged by 55% between 2022’s first quarter and the same period this year.

Last month, VC fund Insight Partners — seen as a bellwether for tech investing — reportedly lowered the $20 billion goal.

One investor told the Financial Times that Insight’s funding difficulties illustrate the sector’s difficulties: “It is a bloodbath.”

At the same time, VC funding’s reputation as the ultimate source of financing for startups might be exaggerated, Jay Wilson, Investment Director at U.K.-based investment firm AlbionVC, told PYMNTS in an interview last week.

“Venture capital is wrong for about 99% of businesses out there,” Wilson said, adding that “VC money is designed for very specific types of businesses with very specific types of ambition and in reality, it is a very expensive financing method.”

He added that VC sits at the top of the capital spectrum from a risk-return standpoint, operating on the principle of outliers and Power Law Returns, which says that an investor makes all of their returns from a small portion of companies in their portfolio.

And due to the high capital costs and double-digit return rates required, some businesses can’t generate value fast enough or blossom into the global category-leading companies as expected in the VC world, Wilson added.