The souring of public markets has officially cascaded into San Francisco’s startup ecosystem, until now a hotbed of exuberance and easy money.
Venture capital deals shrank significantly in June 2022 compared to the month prior, according to startup data provider PitchBook. The total amount of money invested into San Francisco-based private startups fell by 65%, from $4 billion in May to $1.4 billion in June. Over that same period, the total number of San Francisco-based startups that received investments declined by nearly a quarter, from 110 to 84.
“Everything is crashing down to earth. People are being more pragmatic, valuations are resetting,” said Ryan Burke, a partner at Long Venture Partners, a fund based in San Francisco. “Investors are now taking more time and doing more diligence. There’s less hype and pressure and FOMO.”
In the past 10 years, San Francisco’s tech scene blossomed, led by companies like Uber, Airbnb and Dropbox. The surge of startup success crowned the city as the undisputed leader in the global startup economy, dramatically transforming both San Francisco and its people.
What’s driving the decline is an absence of “later-stage deals,” investors and entrepreneurs say. These are typically large-dollar investments into mature startups that will soon “exit,” either by getting sold or being offered on the public stock market, allowing investors to make money. But in the first half of 2022, the amount of money made in exits declined 88% compared to last year.
“If you’re a late-stage investor, why invest now?” said Asheesh Birla, a board member of Ripple and angel investor. “Why not wait for valuations to come down? Companies that raised in 2020 and 2021 are going to start raising again and it’s going to be a very different story this time.”
Additionally, the same overall market conditions spooking the global economy apply to venture capital—specifically rising interest rates, inflation and general uncertainty over an impending recession.
Many investors are now spending more time making sure their current portfolio companies can survive, according to Avidan Ross, founding partner at Root Ventures.
“The bar has become much higher for new investments,” he said. “Entrepreneurs who were planning to raise a large round this year have spent every ounce of energy finding a way to delay the funding round. So, between growth investors pumping the breaks and entrepreneurs delaying their raise, nothing is getting done.”
Experts say the venture capital deal space is likely to get worse in the near future. Since large deals are signed several months in advance, June’s venture capital investments were inked before the the major indexes tipped into bear-market territory. For instance, June’s largest deal was a $130 million investment into Magic Eden, an NFT marketplace built on the Solana blockchain protocol. But the NFT market is now down 70% from April, and the Solana token is also down 60% over that same period.
But deals are still happening, and many investors say a market correction isn’t necessarily a bad thing.
“Many of the big success stories like Airbnb, Uber and Stripe were all started during the last downturn,” said Nick Alexander, who has founded three startups and also invests in early-stage startups. “A macro environment that causes the big tech companies to slow hiring or do layoffs can actually create a great environment for start-ups to find great talent. The pros are still investing in early stage.”
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