Link to Original Article:  North American Startup Funding Shrank Over 50% In Q3, Led By Late-Stage Declines

North American startup investment for the third quarter totaled less than half its year-ago levels, driven by an even steeper drop in late-stage financing.

That was the broad finding from our latest tally of Crunchbase data for U.S. and Canadian venture funding. It shows the pullback that commenced earlier this year has intensified in recent months, as tech valuations in public and private markets contract and the IPO window remains largely shuttered.

Overall, investors put $39.7 billion to work in seed- through growth-stage deals in Q3, down 53% year over year and down 37% from Q2. The year-over-year decline was most pronounced at late stage, which was down 63% in the just-ended quarter.

For perspective, we lay out North American funding totals, color-coded by stage, for the past 11 quarters:

The latest numbers appear less alarming when looking across a two-year time horizon, rather than solely comparing to 2021’s record-breaking tallies. By historical standards, funding totals are still pretty high. Early- and seed-stage dealmaking, for instance, is actually 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 and tech growth contract sharply

We’ll start with late stage, which saw the sharpest slowdown.

Altogether, late-stage venture and technology growth funding totaled $19.4 billion in Q3. That’s a drop of nearly two-thirds from the $53 billion invested in the year-ago quarter. Funding is also down about 45% from Q2.

Deal counts also fell, albeit not as precipitously. For perspective, we look at round counts and investment totals for the past five quarters below:

Public markets may be driving much of the pullback in late-stage private markets. With tech and biotech shares down sharply on major exchanges, investors are rethinking valuations. Additionally, with few IPOs happening, pre-IPO rounds aren’t getting done either.

Meanwhile, many late-stage startups, still flush with cash from the 2021 funding spree, may be putting off new raises until signs of market recovery emerge.

Even as late stage contracted, we did see some big rounds. The largest late-stage funding recipients for Q3 include digital manufacturing startup VulcanForms ($355 million Series C), small business policy provider Pie Insurance ($315 million Series D), and urban greenhouse company Gotham Greens ($310 million Series E).

Early stage is down, but less so

Investors also tapped the brakes on early-stage dealmaking. For Q3, they put $17 billion into 879 known funding rounds. In dollar terms, that represents a 40% drop from the year-ago total and a 28% drop from Q2.

For context, we look at early-stage investment and round counts for the past five quarters below:

Early stage is showing a less dramatic decline than late stage in part because companies are further from exit. Apparently, there’s more confidence that market conditions will improve as these startups mature.

By far the largest early-stage deal of the quarter was a $1 billion Series A for TeraWatt Infrastructure, which provides charging stations for electric fleets. Next up was a $350 Series A for Areteia Therapeutics, a spinoff working on asthma treatments, followed by a $300 million Series B for Mysten Labs, a developer of Web3 infrastructure.

Seed slows some

The funding slowdown was much less pronounced at seed stage.

Overall, investors put $3.3 billion into seed-stage deals in Q3. That’s down 18% from Q2 and 6% from the year-ago quarter, which is markedly less than what we saw at later stages.

Seed stage’s comparatively strong showing indicates that investors are more confident about the long-term outlook than the short-term one. Also, while odds of failure are higher for newly minted startups, valuations are lower, which helps mitigate the risk.

Some of the Q3 rounds were unusually large by seed standards. For instance VeeFriends, an NFT project around intellectual property, snagged $50 million in a July financing. And Rippl Care, a mental health startup focused on seniors, landed a $32 million seed round in September.

Still, those were the outliers. The median disclosed seed or pre-seed round for Q3 was around $2 million, and only 25 deals were for $15 million or higher.

Exits

As Q3 was winding to a close, it was looking like a pretty sluggish exit environment, with a mostly shuttered IPO window and not a ton of big M&A action.

But then, in mid-September, Adobe shattered that narrative, announcing an agreement to buy digital design collaboration unicorn Figma for $20 billion in stock and cash, in what’s been called the largest acquisition of a private, venture-backed company to date.

So yes, it might still look like lean times for most exit-hungry investors. But clearly, it’s still an environment where big deals can get done. Below, we look at what transpired in Q3 for both public offerings and M&A exits.

M&A

We’ll start with M&A, which, as previously mentioned, was largely dominated by the ginormous Figma acquisition. That deal was several multiples larger than every other disclosed acquisition combined.

Still, while no one else was spending like Adobe, there were some interesting and good-sized M&A deals over the course of the quarter. We list the top seven below:

Public offerings

The third quarter was not a great time for tech and biotech public offerings, given that both sectors have been taking a beating on major exchanges. Unprofitable companies—a category that includes most-recently public venture-backed deals—were particularly out of fashion.

Even in this suboptimal environment, however, several funded companies did make it to market, either through previously announced SPAC transactions or traditional IPOs. We list nine public market debuts below:

The largest debut was Rubicon, a Lexington, Kentucky-based online marketplace for waste and recycling, which wrapped up a SPAC merger in August and debuted at a $1.7 billion valuation. Shares have fallen sharply since the debut.

Next up was D-Wave, a quantum computing company that completed its SPAC merger in August in a deal that valued the company around $1.6 billion. Shares are well below their peak but are holding at better-than-average for a SPAC deal.

Down from a very high peak

So as we bid adieu to Q3, what should one make of these mostly downwardly trending numbers?

One of the key things to keep in mind is that we are scaling down from extremely tall heights, as 2021 surpassed prior funding records by a long shot. So, while an over 50% year-over-year funding decline may make for an alarming headline, we’re still close to where we were a couple years ago. And at the time, that was considered a pretty good period for startup funding.

Of course, late stage is faring worse than early stage and seed. Given the large sums of dry powder still in the coffers of venture investors, however, it’s likely they’ll begin spending more profusely once more consensus emerges around valuations and exit conditions improve.

For now, however, the numbers are indeed down. No up cycle lasts forever.

Methodology

The data contained in this report comes directly from Crunchbase, and is based on reported data. Data reported is as of Oct. 3, 2022.

Note that data lags are most pronounced at the earliest stages of venture activity, with seed funding amounts increasing significantly after the end of a quarter/year.

Please note that all funding values are given in U.S. dollars unless otherwise noted. Crunchbase converts foreign currencies to U.S. dollars at the prevailing spot rate from the date funding rounds, acquisitions, IPOs and other financial events are reported. Even if those events were added to Crunchbase long after the event was announced, foreign currency transactions are converted at the historic spot price.

Glossary of funding terms

Seed and angel consists of seed, pre-seed and angel rounds. Crunchbase also includes venture rounds of unknown series, equity crowdfunding and convertible notes at $3 million (USD or as-converted USD equivalent) or less.

Early stage consists of Series A and Series B rounds, as well as other round types. Crunchbase includes venture rounds of unknown series, corporate venture and other rounds above $3 million, and those less than or equal to $15 million.

Late stage consists of Series C, Series D, Series E and later-lettered venture rounds following the “Series [Letter]” naming convention. Also included are venture rounds of unknown series, corporate venture and other rounds above $15 million.

Technology growth is a private-equity round raised by a company that has previously raised a “venture” round. (So basically, any round from the previously defined stages.)