Venture capitalists invested more than $15.3 billion in U.S. startups during the last quarter, but with more than a third of that money going to two established tech giants, smaller startups are continuing to struggle this year to attract investors.
Startups raked in 20 percent more cash than they did during the first three months of the year, but the number of deals dropped for the fourth quarter in a row, according to an industry report released Thursday night. Analysts say private tech behemoths like San Francisco-based Uber, which long ago outgrew the size of a typical “startup,” continue to suck up huge rounds of funding.
“The $1 billion rounds and whatnot, and the $100 million rounds coming into these unicorns — just in terms of traditional venture and how the industry is geared — is ludicrous,” said Adley Bowden, vice president of venture capital database PitchBook.
That data come as the public market is buzzing over Thursday’s debut of Japanese mobile messaging app Line, in the biggest IPO of 2016. After raising more than $1 billion when it priced its offering earlier this week, Line closed its first day of trading up more than 25 percent — a success that experts hope will help jump-start this year’s sluggish tech IPO market.
On the venture capital side, the top two deals of the quarter — Uber raised $3.5 billion from Saudi Arabia’s investment arm and Snapchat, based in L.A.’s Venice district, raised $1.3 billion — accounted for nearly a third of all funds deployed, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters. San Diego-based biotech company Human Longevity had the third-largest round at $220 million, and San Francisco-based messaging platform Slack came in fourth, raking in almost $200 million.
Meanwhile money going to companies raising their first round of VC funding dropped from the first quarter of the year, with such deals accounting for just 13 percent of all dollars invested. Funds invested in seed-stage and early-stage companies dropped 5 percent and 14 percent, respectively.
A pullback from those beginning-stage deals could indicate a worrisome trend, said Duncan Davidson, a general partner at Menlo Park venture capital firm Bullpen Capital. VCs need to continue funding innovation in order for the tech industry to move forward.
“If that dries up,” he said, “the engine that keeps Silicon Valley bubbling will dry up, too.”
In Silicon Valley, VCs poured $8.2 billion into startups during the second quarter — up from $4.9 billion the quarter before, according to the MoneyTree report.
But as venture capitalists get more choosy, that news doesn’t offer much comfort to smaller startups who are still struggling to get funding.
“It’s not that they stop investing,” Davidson said, “but the screen or the sieve for selection gets much tighter.”
Venture capitalists also are slowing down their own fundraising, collecting less money from the limited partners who invest in their funds. Firms raised $8.8 billion for startups in the second quarter, 37 percent less than the quarter before, according to data from Thomson Reuters and the NVCA. But the first quarter of 2016 set a benchmark that was hard to beat: fundraising hit $14.3 billion — a 10-year high.
Venture capitalists still are waiting to see whether they’ll enjoy a return on their prior investments any time soon, as the market for initial public offerings continues to struggle. Activity picked up during the past three months, following the slowest IPO quarter in seven years, according to Renaissance Capital, which manages IPO-focused exchange-traded funds. The second quarter saw 33 IPOs raise $5.5 billion — still well below normal levels.
But there have been two bright spots in recent weeks. Line’s successful debut Thursday follows the explosive IPO last month of San Francisco-based cloud communications startup Twilio. Shares in the communications company spiked the first day of trading to nearly twice their IPO price, and were up another 45 percent when the market closed Thursday.
The public markets have been uneasy over worries about everything from China’s economy to Britain’s vote to leave the European Union. And large companies can put off going public as long as they continue to rake in massive amounts of private funding, said Garvis Toler, global head of capital markets for the New York Stock Exchange.
But the market is stabilizing, and with the successes of Twilio and Line, a window appears to be opening, he said.
“I do think this should prompt a few more to dip their toe in the water,” Toler said, “and consider an IPO in the fall.”
Marisa Kendall covers startups and venture capital. Contact her at 408-920-5009 and follow her at Twitter.com/marisakendall.
