Startups seeking late-stage funding in the United States are failing to attract investors as dour sentiment in the public markets and dull exit conditions make it tougher to justify higher valuations.
US venture capital investments in late-stage deals have plunged 62% to $24.9 billion in the third quarter, according to a report by PitchBook and the National Venture Capital Association (NVCA) on Thursday.
"Right now, the late stage is a much more treacherous market relative to how it has been in the past," Pitchbook's lead VC analyst, Kyle Stanford, said, adding that companies seeking late-stage funding have been relying much more on public market investors.
Late-stage dealmaking activity correlates strongly with the public markets, which have been hurt by rapidly rising interest rates and geopolitical turmoil this year. Companies seeking such deals also face higher chances of a down round, prompting VC firms to take a more cautious approach.
"Over the next six to nine months especially, we should start to see an uptick in down rounds," Stanford said.
Exit activity was dull, with the combined value in 2022 on track to fall below $100 billion for the first time since 2016.
Though seed and early-stage funding remained largely resilient in the first half of the year, there were signs that the dampened investor sentiment is finally spilling over, according to the report.
Early-stage deals plummeted 35% to $13.5 billion in the third quarter, the report said. In the first half of 2022, they had climbed 12% compared to last year.
Overall, the quarter saw $43 billion invested in VC deals across all stages, less than half of last year, when excess liquidity and accommodative monetary policy pushed VC firms to ramp up bets on tech, biotech, healthcare and fintech startups.
