Total investment in North American startups for the third quarter was less than half its levels a year ago, driven by a sharp drop in late-stage funding.
This was the broad find from our latest tally of Crunchbase data for US and Canadian project finance. It appears that the downturn that began earlier this year has intensified in recent months, as technical valuations in public and private market contracts and the IPO window remain largely closed.
Overall, investors invested $39.7 billion to work on initial growth stage deals in the third quarter, down 53% year over year and down 37% from the second quarter. The year-over-year decline was more pronounced in the latter stage, falling 63% in the just ended quarter.
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For perspective, we place North American funding totals, color-coded by stage, for the past eleven quarters:
The latter numbers seem less alarming when looking over a two-year time horizon, rather than just comparing the record numbers for 2021. By historical standards, total funding is still pretty high. For example, early-stage and seed deals are above 2020 levels.
Below, we look at the latest quarterly numbers in more detail, focusing on investment by stage as well as major exits.
Late stage, technological growth is shrinking sharply
We’ll start with a late phase, which has experienced the most deceleration.
In all, last-stage project and technology growth financing totaled $19.4 billion in the third quarter. That’s down nearly two-thirds from the $53 billion invested in the prior quarter last year. Funding is also down about 45% from the second quarter.
The number of deals also decreased, although not as fast. For perspective, we take a look at the round-up numbers and investment totals for the past five quarters below:
Much of the decline in the private markets may be driven by public markets in the later stages. With technology and biotech stocks dropping sharply on major exchanges, investors are rethinking valuations. Additionally, with a few IPOs taking place, the pre-IPO rounds have not yet been completed either.
Meanwhile, many lagging startups, which are still pouring out of their funding spree in 2021, may delay new increases until signs of a market recovery show.
Even with the late stage shrinking, we saw some big rounds. Largest third-quarter late-stage funding recipient includes digital manufacturing startup Vulcan Forms ($355 million Series C), small business policy provider pie insurance ($315 million in Series D), the urban greenhouse company Gotham Greens ($310 million Series E).
The early stage is disabled, but less so
Investors also put pressure on the brakes early in dealmaking. For the third quarter, they put $17 billion into 879 known funding rounds. In dollar terms, this is a 40% decrease from last year’s total and a 28% decrease from the second quarter.
For context, we look at early stage investing and cycle counts for the past five quarters below:
The early stage shows a less dramatic decline than the late stage, in part because companies are far from exiting. Apparently, there is more confidence that market conditions will improve as these startups mature.
By far, the biggest deal in the early stage of the quarter was A $1 billion Series A for Infrastructure TeraWattWhich provides charging stations for electric fleets. Next was $350 Series A for Areteia treatmentsa branch working on asthma treatments, followed by A $300 million Series B for Misting LaboratoriesWeb3 infrastructure developer.
Seeds slow down some
The funding slowdown was less pronounced in the initial phase.
Overall, investors put $3.3 billion into initial stage deals in the third quarter. That’s down 18% from the second quarter and 6% down from the same quarter last year, and it’s notably lower than what we’ve seen in later stages.
The relatively strong performance of the seed stage indicates that investors are more confident about the long-term outlook than the short-term. Also, while the odds of failure are higher for new startups, valuations are lower, which helps mitigate risks.
Some of the Q3 rounds were unusually large by seed standards. for example VeeFriendsThe NFT Project on Intellectual Property received $50 million in July funding. And the Rippl . Carea mental health startup focused on older adults, received an initial round of $32 million in September.
However, those were the outliers. The average amount disclosed in the initial or pre-incorporation round for the third quarter was about $2 million, and only 25 deals were for $15 million or more.
As the third quarter drew to a close, it looked like a very slow exit environment, with a mostly closed IPO window and not a lot of big M&A.
But then, in the middle of September, Adobe Shattered that novel, declaring that purchase agreement Collaboration on digital unicorn design figma for $20 billion in stock and cash, in what has been called the largest private venture-backed acquisition to date.
So, yes, it may seem like rough times for most investors hungry to get out. But it’s clearly still an environment in which big deals can be done. Below, we take a look at what happened in the third quarter for both public offerings and mergers and acquisitions.
merger and acquisition
We’ll start with mergers and acquisitions, which, as mentioned earlier, were largely dominated by the massive acquisition Figma. That deal was several multiples larger than every other acquisition disclosed combined.
However, while no one else was spending like Adobe, there were some interesting and well-sized M&A deals over the course of the quarter. We list the top seven below:
The third quarter wasn’t a great time for tech and biotech public offerings, given that both sectors were taking a beating on the major exchanges. Unprofitable companies — a category that includes the most recent deals backed by public projects — have been particularly antiquated.
Even in this suboptimal environment, many funded companies have been able to access the market, either through previously announced SPAC transactions or traditional initial public offerings. We list nine public market debuts below:
It was a bigger debut Rubicon, a Lexington, Kentucky-based online marketplace for waste and recycling, which wrapped up the SPAC merger in August and debuted at $1.7 billion. The stock has fallen sharply since its debut.
Next was D-wave, the quantum computing company that completed its merger with SPAC in August in a deal that valued the company at about $1.6 billion. Stocks are well below their peak but hold a better-than-average price for a SPAC deal.
Down from a very high peak
So, as we bid farewell to the third quarter, what should we take away from these mostly bearish numbers?
One of the main things to keep in mind is that we are shrinking from very high altitudes, with 2021 well past our previous funding records. So while a more than 50% year-over-year drop in funding may be a worrying headline, we’re still close to where we were two years ago. And at the time, that was a very good period for funding startups.
Of course, the late stage is worse than the early and seed stage. Given the large amounts of dry powder still in the coffers of enterprising investors, they are likely to start spending profusely once more consensus emerges on valuations and exit conditions improve.
At the moment, however, the numbers are already low. Don’t hit a cycle that lasts forever.
The data in this report comes directly from Crunchbase, and is based on reported data. Data reported as of October 3, 2022.
Note that data lag is more pronounced in the early stages of project 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 noted. Crunchbase converts foreign currencies into US dollars at the spot rate prevailing from the date of funding rounds, acquisitions, IPOs and other financial events. Even if these events are added to Crunchbase long after the event is announced, forex transactions are converted at the historical spot rate.
Glossary of Financing Terms
Seed and Angel consists of seeds, pre-seeds and angel rounds. Crunchbase also includes adventure rides from an unknown chain, crowdfunding stocks and convertible securities of $3 million (USD) or less.
The early stage consists of Series A and B rounds, as well as other round types. Crunchbase includes adventure tours from the unknown series, venture companies and other tours over $3 million, and those under or equal to $15 million.
The late stage consists of Series C, Series D, Series E and project rounds with suffixes following the Series [Letter]Naming convention. Also included are adventure tours from the little-known series, venture companies and other tours valued at over $15 million.
Tech growth is a round of private equity sparked by a company that has already raised a “project” round. (So, any round of predetermined stages).
Clarification: Dom Guzman
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