North American investment in startups in the third quarter totaled less than half of its levels from a year ago, due to an even steeper drop in late-stage funding.
That was the overall conclusion of our latest Crunchbase data tally for US and Canadian venture capital funding. It shows that the pullback that began earlier this year has intensified in recent months as tech valuations in public and private markets contract and the IPO window remains largely closed.
Overall, investors invested $39.7 billion in seed-to-growth deals in the third quarter, down 53% year-over-year and 37% year-on-year. compared to the second quarter. The year-over-year decline was most pronounced in late stage, which fell 63% in the quarter just ended.
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For perspective, we present North American funding totals, color-coded by stage, for the last 11 quarters:
The latest numbers look less alarming over a two-year horizon, rather than comparing only to the record numbers of 2021. By historical standards, funding totals are still quite high. For example, early-stage and seed-stage transactions are actually above 2020 levels.
Below, we take a closer look at the latest quarterly figures, focusing on investments by stage as well as key outflows.
Late-stage and technology growth contracts sharply
We’ll start with the late leg, which has seen the biggest slowdown.
In total, venture capital and late-stage technology growth funding totaled $19.4 billion in the third quarter. That’s down nearly two-thirds from the $53 billion invested in the year-ago quarter. Funding is also down about 45% from Q2.
The number of transactions also fell, but not as precipitously. To put into perspective, below we take a look at the number of rounds and total investments for the last five quarters:
Public markets could be responsible for much of the decline in late-stage private markets. With tech and biotech stocks falling sharply on major exchanges, investors are rethinking valuations. Plus, with few IPOs, pre-IPO rounds aren’t happening either.
Meanwhile, many late-stage startups, still cash-strapped from the 2021 funding frenzy, may hold off on further increases until signs of market recovery appear.
Even though the late phase contracted, we saw some big turns. Largest late-stage funding recipients for Q3 include digital manufacturing startup Vulcan Forms ($355 million Series C), small business font provider Pie insurance ($315 million Series D), and urban greenhouse company Gotham Greens ($310 million Series E).
The early stage is declining, but less
Investors also held back deals at an early stage. For the third quarter, they invested $17 billion in 879 known funding rounds. In dollars, that’s down 40% from the prior year’s total and down 28% from the second quarter.
For context, below we take a look at the seed investments and the number of rounds for the past five quarters:
The early stage shows a less dramatic decline than the late stage, in part because companies are further from exit. Apparently, there is more confidence that market conditions will improve as these startups mature.
By far the largest transaction early in the quarter was a $1 billion Series A for TeraWatt infrastructure, which provides charging stations for electric fleets. The next step was a $350 Series A for Therapeutic Areteiaa spin-off working on asthma treatments, followed by a $300 million Series B for Mysten Labsa Web3 infrastructure developer.
The seed slows down some
The slowdown in funding was much less pronounced at the seed stage.
Overall, investors poured $3.3 billion into seed deals in the third quarter. That’s down 18% from the second quarter and 6% from the prior year quarter, which is significantly lower than what we’ve seen in later stages.
The relatively strong results from the seed phase indicate that investors are more confident in the long-term outlook than in the short-term. Additionally, while the odds of failure are higher for newly created startups, valuations are lower, which helps to mitigate risk.
Some of the rounds in the third quarter were unusually large by seed standards. For instance VeeFriends, an NFT project around intellectual property, landed $50 million in funding in July. And Ripple Carea mental health startup focused on seniors, landed a $32 million seed round in September.
Yet these are the outliers. The median seed or pre-seed round disclosed for the third quarter was around $2 million, and only 25 deals were at $15 million or more.
As the third quarter drew to a close, it looked like a fairly slow exit environment, with a mostly closed IPO window and not a ton of big M&A action.
But then, in mid-September, Adobe broke this narrative, announcing a purchase agreement unicorn digital design collaboration figma for $20 billion in stock and cash, in what has been called the largest venture-backed private company acquisition to date.
So yes, this could still look like a lean period for most exit-hungry investors. But clearly, it’s still an environment where big business can be done. Below, we take a look at what happened in the third quarter for public offerings and M&A exits.
Mergers & Acquisitions
We’ll start with mergers and acquisitions, which, as mentioned earlier, was largely dominated by the gigantic acquisition of Figma. This deal was several times larger than all other disclosed acquisitions combined.
Still, while no one else was spending like Adobe, there were some interesting, good-sized M&A deals in the quarter. We list the top seven below:
The third quarter was not a good time for tech and biotech public offerings, as both sectors took a beating on major exchanges. Unprofitable companies — a category that includes the most recent venture capital-backed public deals — were particularly outdated.
Even in this sub-optimal environment, however, several funded companies have managed to make it to market, either through previously announced SPAC deals or traditional IPOs. We list nine public market debuts below:
The biggest start was Rubicon, a Lexington, Kentucky-based online trash and recycling marketplace that completed a SPAC merger in August and debuted at a $1.7 billion valuation. The shares have fallen sharply since the start.
The next step was Wave D, a quantum computing company that completed its SPAC merger in August in a deal valuing the company at around $1.6 billion. Stocks are well below their peak, but still holding above average for a SPAC deal.
From the top of a very high peak
So, as we bid farewell to the third quarter, what are we to make of these mostly declining numbers?
One of the key things to keep in mind is that we are scaling back from extremely high heights as 2021 far surpassed previous funding records. So while a more than 50% year-over-year decline in funding can make headlines alarmingly high, we’re still close to where we were a few years ago. And at the time, it was considered a pretty good time for startup funding.
Of course, the advanced stage is doing worse than the early stage and the seeds. However, given the large sums of dry powder still in the coffers of venture capitalists, it is likely that they will start spending more heavily once a new consensus emerges around valuations and exit conditions settle. will improve.
For now, however, the numbers are actually down. No upward cycle lasts forever.
The data in this report comes directly from Crunchbase and is based on reported data. Data reported is as of October 3, 2022.
Note that data lags are more pronounced in the early stages of venture capital activity, with seed funding amounts increasing significantly after the end of a quarter/year.
Please note that all funding values are given in US dollars unless otherwise stated. Crunchbase converts foreign currency to US dollars at the spot rate in effect as of the date funding rounds, acquisitions, IPOs, and other financial events are reported. Even though these events were added to Crunchbase long after the event was announced, foreign currency transactions are converted at the historical spot price.
Glossary of Funding Terms
Seed and angel consists of seed, pre-seed and angel rounds. Crunchbase also includes VC rounds of unknown series, equity crowdfunding, and convertible notes at $3 million (USD or converted USD equivalent) or less.
The early stage includes Series A and Series B rounds, as well as other types of rounds. Crunchbase includes VC rounds of unknown rounds, venture capital and other rounds greater than $3 million, and those less than or equal to $15 million.
Late phase includes Series C, Series D, Series E and subsequent VC rounds after “Series [Letter]” naming convention. Also included are VC rounds of unknown series, VC and other rounds above $15 million.
Tech growth is a private equity round raised by a company that previously raised a “venture” round. (So basically any round of the previously defined stages.)
Illustration: Dom Guzman
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