The drop was another fallout of rising inflation and widespread economic uncertainty, and a retreat after years of a funding boom.
Investments in U.S. tech start-ups plunged 23 percent over the last three months, to $62.3 billion, the steepest fall since 2019, according to figures released on Thursday by PitchBook, which tracks young companies. Even worse, in the first six months of the year, start-up sales and initial public offerings — the primary ways these companies return cash to investors — plummeted 88 percent, to $49 billion, from a year ago.
The declines are a rarity in the start-up ecosystem, which enjoyed more than a decade of outsize growth fueled by a booming economy, low interest rates and people using more and more technology, from smartphones to apps to artificial intelligence. That surge produced now-household names such as Airbnb and Instacart. Over the past decade, quarterly funding to high growth start-ups fell just seven times.
But as rising interest rates, inflation and uncertainty stemming from the war in Ukraine have cast a pall over the global economy this year, young tech companies have gotten hit. And that foreshadows a difficult period for the tech industry, which relies on start-ups in Silicon Valley and beyond to provide the next big innovation and growth engine.
“We’ve been in a long bull market,” said Kirsten Green, an investor with Forerunner Ventures, adding that the pullback was partly a reaction to that frenzied period of dealmaking, as well as to macroeconomic uncertainty. “What we’re doing right now is calming things down and cutting out some of the noise.”
The start-up industry still has plenty of money behind it, and no collapse is imminent. Investors continue to do deals, funding 4,457 transactions in the last three months, up 4 percent from a year ago, according to PitchBook. Venture capital firms, including Andreessen Horowitz and Sequoia Capital, are also still raising large new funds that can be deployed into young companies, collecting $122 billion in commitments so far this year, PitchBook said.
Start-ups are also accustomed to the boy who cried wolf. Over the last decade, various blips in the market have led to predictions that tech was in a bubble that would soon burst. Each time, tech bounced back even stronger, and more money poured in.
Even so, the warning signs that all is not well have recently become more prominent.
Venture capitalists, such as those at Sequoia Capital and Lightspeed Venture Partners, have cautioned young firms to cut costs, conserve cash and prepare for hard times. In response, many start-ups have laid off workers and instituted hiring freezes. Some companies — including the payments start-up Fast, the home design company Modsy and the travel start-up WanderJaunt — have shut down.
The pain has also reached young companies that went public in the last two years. Shares of onetime start-up darlings like the stocks app Robinhood, the scooter start-up Bird Global and the cryptocurrency exchange Coinbase have tumbled between 86 percent and 95 percent below their highs from the last year. Enjoy Technology, a retail start-up that went public in October, filed for bankruptcy last week. Electric Last Mile Solutions, an electric vehicle start-up that went public in June 2021, said last month that it would liquidate its assets.
The start-up market has now reached a kind of stalemate — particularly for the largest and most mature companies — which has led to a lack of action in new funding, said Mark Goldberg, an investor at Index Ventures. Many start-up founders don’t want to raise money these days at a price that values their company lower than it was once worth, while investors don’t want to pay the elevated prices of last year, he said. The result is stasis. “It’s pretty much frozen,” Mr. Goldberg said.
Still, the huge piles of capital that venture capital firms have accumulated to back new start-ups has given many in the industry confidence that it will avoid a major collapse.