Venture investment rebounds in Q2 but overall market remains ‘suspended’

At first glance, the venture industry appeared to have bounced back in a big way in the second quarter. But founders and funders in the struggling sector shouldn’t get too excited just yet.

Venture organizations invested $55.6 billion in U.S. startups in the just-completed quarter, according to data released late Tuesday from PitchBook and the National Venture Capital Association. That was 47% higher than in the first quarter and represented the highest tally since the second quarter of 2022, when the industry was still in its post-pandemic boom.

But more than $15 billion of the most recent quarter’s tally went to just two companies — New Jersey’s CoreWeave and xAI, Elon Musk’s Burlingame-based artificial-intelligence startup, noted Kyle Stanford, a lead venture-capital analyst at PitchBook. Setting aside those funding rounds, the tally would have been more or less in line with what the industry had recorded in the previous four quarters.

The venture market is still marked by a lot of uncertainty, Stanford said.

“It’s not necessarily a positive market or a negative market,” he said. “It’s just a suspended market.”

To that point, U.S. startups closed an estimated 4,226 venture deals in the quarter, according to PitchBook and the NVCA. That number would also be the highest tally since the second quarter of 2022.

But it was likely boosted by companies that last year delayed raising new funding by laying off staff or making other cuts to conserve cash, Stanford said. Startups’ valuations have gone down since the boom, and many companies have held off on raising new funds to avoid having their own estimated worth reset.

That’s showing up in PitchBook and the NVCA’s data. The number of deals nationwide slumped to fewer than 3,700 in the second and third quarters last year.

Meanwhile, for startups that closed deals in the second quarter, the median amount of time that had passed since their previous funding round was 1.7 years, he said. That’s about a third of a year longer than typical, Stanford said.

“All those companies that should have been raising a round [last year] are now being forced to come back to market,” he said.

And other data indicated that the industry is continuing to struggle.

Venture outfits raised $28 billion in new capital in the second quarter, far eclipsing the $9.3 billion they raised in the first. But even with that windfall, they’re still on track to raise the least amount of money in a full year since 2019.

That’s likely a result of the dearth of successful exits, such as when a startup completes an initial public offering or is acquired by another company. The value of all such exits — the amount companies sold for or their initial market capitalization when going public — was $23.6 billion in the second quarter. That was down from $25.4 billion in the first quarter and well off the pace set during the 2020-21 boom, when exits routinely topped $100 billion a quarter.

There was expectation that the successful IPOs of San Francisco-based Reddit and Santa Clara chipmaker Astera Labs in the first quarter would help open up the public markets to the many startups that have been waiting in the wings to head to Wall Street .

But after the second quarter began with two notable tech IPOs — those of digital coupon company Ibotta and Palo Alto-based cybersecurity provider Rubrik — there haven’t been any since, Stanford noted.

The problem for the venture industry is that successful exits, particularly from IPOs, are what typically provide the capital for their next generation of funds and investments. Typically, the venture firms’ limited partners — the family offices, pension funds and other investors who put their money into venture funds to have it invested in startups — take the proceeds they get from such exits and plow it back into new funds.

But with so few payouts in recent years, that source of capital has dried up, Stanford said. Other than some of the well-known firms, like Andreessen Horowitz, the venture industry is struggling to raise new cash, he said. That struggle to bring in new cash is, in turn, depressing new investments in startups, he said.

Stanford said he doesn’t believe the situation will improve markedly anytime soon. Because the two political parties have starkly different policy plans and the outcome is still in doubt, the upcoming presidential election is causing a great deal of uncertainty in the business community, leading investors to be cautious, he said.

Earlier this year, the Federal Reserve had telegraphed that it would cut interest rates later this year, a move that many expected would help jump-start the IPO market. But with inflation staying above the Fed’s targets, the central bank now seems set to keep interest rates as they are for longer than it or investors had previously anticipated. That’s likely to prompt startups that might have been planning to go public this year to delay, Stanford said.

Such factors are likely “going to lengthen out this time” for the venture market to really rebound, he said.

“We would like it to come back next quarter or the quarter after,” he said. “But it’ll probably end up being three or four more quarters before some material ... momentum can be gained from exits where we can funnel that back into deal-making.”

If you have a tip about tech, startups or the venture industry, contact Troy Wolverton at twolverton@sfexaminer.com or via text or Signal at 415.515.5594.