US VC funding cools off 2021 record as investors keep their powder dry By Reuters

US VC funding cools off 2021 record as investors keep their powder dry By Reuters

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By Crystal Hu

(Reuters) – Funding for US startups fell by a third from its peak in 2021, according to PitchBook data released on Friday, despite record amounts of capital raised by new and existing venture funds.

Private venture-backed companies raised a total of $238.3 billion last year, down 31% from 2021’s record $344.7 billion, the data shows.

Although 2022 was a challenging year for budding fund managers, $162.6 billion closed across 769 funds, setting an annual record for capital raised and marking the rise of venture capital as an asset class for wealth managers.

Sitting on a record pile of untapped funds, investors are slowing the deployment of capital to private technology companies that are largely unprofitable in a year of rising interest rates, geopolitical risk and volatility in public markets.

“VCs didn’t want to price a falling knife situation, so things almost ground to a halt,” said Pegah Ebrahimi, co-founder of FPV Ventures, a $450 million fund that launched in 2022. “No one wants to lean unless they’re sure how deep the ground is.”

Public market performance continues to weigh on private market investor sentiment. IPOs remain rare, limiting exit opportunities for VC investors. According to the BVP Nasdaq Emerging Cloud Index, revenue multiples for tech darlings like enterprise software firms fell to about 5.7 times revenue from 17 times a year ago.

While angel and seed-stage deals remain relatively resilient, growth and late-stage firms must now opt for a “downside round,” meaning the target companies are valued less than their last round, or structured financing with debt-like characteristics, investors take advantage of more downside protection.

Cybersecurity startup Snky raised $196 million in December on a 12% fall in valuation to $7.4 billion. TripActions, a corporate travel and expense company, raised $150 million in structured capital from Coatue Management.

“I think companies that are trying to make money again are in for a pretty rude awakening,” said Larry Aschebrook, managing partner at G Squared. “Investors are looking for more, and for the first time in years, control of pricing is being returned to managers.”

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