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

Reuters

Published Jan 06, 2023 06:07AM ET

Updated Jan 06, 2023 02:31PM ET

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.