Is this the new normal? Bay Area startup fundings hit 6-year low in Q1
Silicon Valley Business Journal | Cromwell Schubarth | April 5, 2017
Venture industry leaders say their world continued to “normalize” in the first quarter of this year as the gap between the haves and have-nots of the startup world widened.
But the kind of normal reported Wednesday by PitchBook Data and the National Venture Capital Association might not seem like a great thing to a lot of founders.
Funding deals in the Bay Area in the first three months of this year dropped to their lowest level since the end of 2010, PitchBook and the NVCA said.
That is a little more than six years ago, when many of today’s “unicorns” like Uber, Airbnb and Palantir Technologies had yet to raise a round at a private valuation of $1 billion or more. In fact, 15 of the 50 Bay Area venture-backed companies valued at the unicorn level today were founded in 2010 or later.
There were 386 deals done in the Silicon Valley and San Francisco regions between January and March, a drop of 28 percent from a year ago. That’s down by about 31 percent from the number of fundings done in the recent peak quarter of Q1 in 2015.
The $6.7 billion invested, however, remains in the $5 billion to $10 billion range it has hovered around since early in 2014. That’s not counting the outlier second quarter of last year when local companies raised more than $12.3 billion, fueled largely by a mega-funding of Uber.
“It’s harder for things to get funded and the bar is higher than it was a little while ago,” Bob Ackerman of Allegis Capital said in an interview. “In parallel to that there is a flight to quality. Larger checks are going into those companies where there is a proven use case and demonstrated traction.”
Bobby Franklin, CEO of the venture association, said VCs have plenty to invest. After raising a 10-year high of $41 billion in new capital last year, there was another $7.9 billion raised in the first quarter.
“The deceleration of investment activity that we experienced at the end of 2016 continued in the first quarter, signifying that we are in fact returning to a more rational level of investment activity more in line with the annual growth rate of the industry over the last ten years,” Franklin said in the report.
“After seeing large pools of capital raised in recent quarters, venture investors will continue to have dry powder to deploy to the entrepreneurial ecosystem, albeit with a more disciplined approach,” he said. “Combined with a positive outlook for a strengthening IPO environment for venture-backed companies, there is much to be optimistic about in 2017.”
There were 47 exits by IPO or M&A in the Bay Area in the first quarter, led by the $3.7 billion IPO eve acquisition of San Francisco-based AppDynamics by Cisco Systems. That’s down two from the fourth quarter of last year and is the lowest number recorded since the banking crisis years of 2008 and 2009.
The PitchBook report, however, sees promising signs of more exits in the future.
“The lack of available late-stage funding coupled with the initial success of the Snap and MuleSoft IPOs could result in more venture-backed companies following suit,” it said.
MuleSoft was the first Bay Area tech IPO in about six months when it went public last month. Its stock has remained up around 40 percent since. Another San Francisco company, Okta, is expected to make its Wall Street debut on Friday as the region’s second IPO for 2017.
Allegis Capital’s Ackerman agrees that more companies are likely to follow them this year.
“You look at the public markets today and you have to think they are pretty fully valued,” he said. “What tends to happen when you have a more mature public market is investors start looking for growth and that tends to favor the IPO market.”
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