Only 44 Startups In Silicon Valley Got Funded Last Month

(Bloomberg) -- Tech investors appear to be getting less generous as the coronavirus pandemic riles markets, according to a new report chronicling the recent impact of the coronavirus on the industry. It found that valuation growth at Silicon Valley startups is slowing and investors are handing out fewer checks. 

The report, released by law firm Fenwick & West LLP, indicates that venture capitalists are becoming more cautious in light of the economic downturn. On average, when Silicon Valley startups raised money this time last year, each funding round sent a company’s value up by 63%. In January of this year, before the pandemic hit, the average round saw startups’ valuations increase by 117%—  more than double the prior-round valuation. But for startups in the region that raised money in March of this year, the price increase was just 46%.

Startups’ willingness to lower expectations may reflect the necessity of having cash in a time of heightened economic uncertainty, said Barry Kramer, a partner emeritus at Fenwick & West and one of the authors of the report. Many companies are eager to raise funds to see themselves through the coming storm—even if the prices are not ideal. 

“Companies just like shoring up the balance sheet, just like people are stocking up on toilet paper,” Kramer said. “It makes them feel better to have it in the attic.”

The cash piles could become essential, particularly as young companies see revenue drop-offs because of the virus. At the same time, “money could be harder to raise in the future,” Kramer said. “So ‘take it when it’s available’” has become the prevailing attitude, he said.

The number of Silicon Valley companies to close funding rounds has also trended downward in the last month. In January, 126 startups in the region raised money from investors. The number was particularly high, perhaps thanks to a light December. But that sank to 60 companies in February—about on par with February of last year. And it dropped further last month, when just 44 companies in the region raised cash, the report said.

A greater portion of the companies that did raise money were older and more established than they have been in years past, while the number of Series A rounds has shrunk. The trend toward larger companies is also evidenced in the smaller upticks in valuations, Kramer said. Later-stage startups generally experience smaller price increases in percentage terms.

The outsized activity among those later-stage companies is significant. It means venture capitalists were prioritizing protecting existing investments over finding new ones.

One potential bright spot in the report: The authors did not see an increase in terms such as senior liquidation preferences, meaning the right to get paid first in an event like an acquisition or liquidation. An uptick in those terms would indicate increasing nervousness among investors about the prospects of the startups.

Despite the pullback, venture capitalists have plenty of cash to spend on the startups they favor. In the first quarter of this year, 62 venture capital funds raised a total of $21 billion in the U.S., according to data released last week by PitchBook and the National Venture Capital Association. The total dollar value spent on startups stayed roughly level for the quarter.

Overall, drawing conclusions from month-by-month data comes with perils, because of the small numbers compared to quarter-by-quarter reports, Kramer said. Fenwick’s report studied startups with headquarters listed in the nine major area codes around the San Francisco Bay. But Kramer added that the contrast in the numbers was stark enough that he and his colleagues decided to break out the monthly data.

©2020 Bloomberg L.P.

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