North American Startup Funding Shrank Over 50% In Q3, Led By Late-Stage Declines

Investment in North American startups during the third quarter totaled less than half year-earlier levels, driven by an even steeper drop in late-stage financing.

That was the overall finding of our latest count of Crunchbase data for US and Canadian business financing. 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 put $39.7 billion to work on early-stage growth deals in the third quarter, down 53% year-over-year and down 37% from the second quarter. The year-over-year decrease was more pronounced in the last stage, which was 63% lower in the quarter that just ended.

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For perspective, here are North American funding totals, color-coded by stage, for the past 11 quarters:

The latest numbers seem less alarming when viewed over a two-year time horizon, rather than solely compared to the record numbers of 2021. By historical standards, funding totals remain quite high. Early and seed stage trading, for example, is actually above 2020 levels.

Below, we look at the latest quarterly figures in more detail, focusing on investment by stage, as well as the main exits.

Tech and late-stage growth contracts sharply

We will start with the last stage, which experienced the greatest slowdown.

In total, funding for technology growth and late-stage companies totaled $19.4 billion in the third quarter. That’s a drop of almost two-thirds from the $53 billion invested in the prior year quarter. Funding is also down 45% from the second quarter.

Deal counts also fell, though not as precipitously. For perspective, we look at round counts and investment totals for the last five quarters below:

Public markets may be driving much of the pullback in late-stage private markets. With tech and biotech stocks falling sharply on major exchanges, investors are rethinking valuations. Also, with few IPOs, the pre-IPO rounds are also not done.

Meanwhile, many late-stage startups, still sitting on plenty of cash from the 2021 funding wave, may be putting off further raises until signs of market recovery emerge.

Even when the last leg contracted, we saw some big rounds. Biggest recipients of late-stage funding for Q3 include digital manufacturing startups VulcanForms ($355 million Series C), small business policy provider cake insurance ($315 million Series D) and urban greenhouse company gotham greens ($310 million Series E).

The initial stage is low, but less

Investors also hit the brakes in the early stages of trading. For the third quarter, they put up $17 billion in 879 known funding rounds. In dollar terms, that represents a 40% drop from the prior year total and a 28% drop from the second quarter.

For context, we break down early-stage investment and round counts for the past five quarters below:

The early stage shows a less dramatic decline than the late stage, in part because companies are further from the exit. There appears to be more confidence that market conditions will improve as these startups mature.

By far the largest initial deal of the quarter was a $1 billion Series A by Terawatt Infrastructure, which provides charging stations for electric fleets. The next was a $350 Series A by Areteia Therapeuticsa spin-off working on asthma treatments, followed by a $300 million Series B by Mysten Laboratoriesa developer of the Web3 infrastructure.

The seed slows down a bit

The funding slowdown was much less pronounced in the initial stage.

Overall, investors poured $3.3 billion into early-stage deals in the third quarter. That’s down 18% from the second quarter and down 6% from the prior year quarter, which is noticeably less than what we saw in later stages.

The comparatively strong result of the seed stage indicates that investors are more confident in the long-term prospects than in the short-term ones. Also, while the odds of failure are higher for newly created startups, valuations are lower, which helps mitigate risk.

Some of the third quarter rounds were unusually large by seed standards. For example VeeFriends, an NFT project around intellectual property, secured $50 million in July funding. Y Ripple Carea mental health startup focused on seniors, landed a $32 million seed round in September.

Still, those were the outliers. The median disclosed pre-seed or seed round for the third quarter was around $2 million, and only 25 deals were for $15 million or more.

Departures

As the third quarter drew to a close, it looked like a pretty slow exit environment, with a mostly closed IPO window and not a lot of big M&A action.

But then, in the middle of September, Adobe shattered that narrative, announcing a purchase agreement digital design collaboration unicorn figma for $20 billion in stock and cash, in what has been called the largest acquisition by a private company backed by venture capital to date.

So yes, it may still seem like a tough time for most exit-hungry investors. But clearly, it is still an environment in which great business can be done. Below, we look at what happened in the third quarter for both public offerings and M&A exits.

BREAST

We’ll start with mergers and acquisitions, which, as mentioned above, was largely dominated by the huge acquisition of Figma. That deal was several multiples larger than any other disclosed acquisition combined.

Still, while no one else was spending like Adobe, there were some interesting and good-sized M&A deals over the course of the quarter. Here are the top seven:

public offers

The third quarter was not a good time for tech and biotech IPOs as both sectors have been taking a beating on major exchanges. Unprofitable companies, a category that includes the most recent public company-backed deals, were particularly old-fashioned.

However, even in this suboptimal environment, several financed companies came to market, either through previously announced SPAC transactions or traditional IPOs. Here are nine public market debuts:

The biggest debut was Rubicon, a Lexington, Kentucky-based online marketplace for waste and recycling, which concluded a merger with SPAC in August and debuted at a $1.7 billion valuation. Shares have fallen sharply since the debut.

the next was D wave, a quantum computing company that completed its merger with SPAC in August in a deal that valued the company at about $1.6 billion. The stock is well below its peak but remains above average for a SPAC deal.

Down from a very high peak

So, as we bid farewell to the third quarter, what should we make of these mostly downward-trending numbers?

One of the key things to keep in mind is that we are descending from extremely high heights, as 2021 shattered previous funding records by a long shot. So while a funding decline of more than 50% year over year may make for an alarming headline, we’re still close to where we were a couple of years ago. And at the time, it was considered a pretty good period for startup funding.

Of course, the late stage is doing worse than the early stage and seed. However, given the large sums of dry powder still sitting in the coffers of VCs, they are likely to start spending more lavishly once more consensus emerges on valuations and exit conditions improve.

For now, however, the numbers are really low. No up cycle lasts forever.

Methodology

The data contained in this report comes directly from Crunchbase and is based on reported data. The reported data is as of October 3, 2022.

Note that data lags are more pronounced in the early stages of company activity, with seed funding amounts increasing significantly after the end of a quarter/year.

Please note that all financing values ​​are in US dollars unless otherwise stated. Crunchbase converts foreign currencies to US dollars at the prevailing spot rate as of the date financing rounds, acquisitions, initial public offerings and other financial events are reported. Even if those events were added to Crunchbase long after the event was announced, foreign currency transactions are converted to the historical spot price.

Glossary of financing terms

Seed and Angel consists of seed, pre-seed, and angel rounds. Crunchbase also includes venture rounds of unknown series, equity crowdfunding and convertible notes at $3 million (USD or USD equivalent based on conversion) or less.

The initial stage consists of Series A and Series B rounds, as well as other types of rounds. Crunchbase includes unknown series venture rounds, corporate venture and other rounds greater than $3 million, and those less than or equal to $15 million.

The late stage consists of Series C, Series D, Series E, and the later lettered risk rounds that follow “Series [Letter]denomination agreement. Risk rounds of unknown series, corporate risk and other rounds of more than $15 million are also included.

The tech growth is a private equity round raised by a company that previously raised a “venture” round. (Basically any round of the stages defined above.)

Illustration: Dom Guzman

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