Inflation, bank failures and instability abroad all helped drag down venture capital funding for startups at all stages and in all sectors during the first quarter of the year, a new report shows.
Austin area startups raised just over $1 billion in venture funding in Q1 this year. That’s the area's best quarter since Q1 2022, when Austin companies raised an all-time high of $2.4 billion across 156 deals.
While total venture funding increased compared to the past three quarters, the number of deals fell dramatically, according to the Q1 2023 Venture Monitor report put together by PitchBook and the National Venture Capital Association.
PitchBook only logged 63 deals in Q1 this year. That’s down from 102 in Q4 2022 when local companies raised $888 million, and it’s the lowest number of venture deals in Austin since Q4 2016, which also saw 63 deals but only $250 million in total funding. Nationally, venture capital deal counts have been on a steady decline since Q4 2021.
The number of later stage deals, series A and beyond, has fallen. That's partially because many startups raised big rounds at relatively high valuations during the frothy times in 2021, said Morgan Flager, managing partner at Austin-based VC firm Silverton Partners.
While many VC firms refilled their coffers in the past year or two, many are being patient, or picky, in deploying that money.
"The good news for entrepreneurs is it's there," Flager said. "You just have to make a compelling case as to why it should be you and not somebody else, or not them sitting on their hands... people are also more sensitive to burn rate and capital consumption. They still want to see growth, but they don't want to see growth at all costs, like maybe they did in 2021, because capital is harder to come by."
Flager said he expects later stage deals to pick up, but early-stage funding will likely be a bit slower for the months to come.
"We're still seeing super high quality and a good volume of businesses here in Austin ... it's gonna be difficult for the next one to two years, is kind of what it feels like," he added.
Austin is still packed with tech talent and big ideas, and the current funding slump will likely reverse.
"I think there's enough capital here to continue to fund it, and as the economy improves and the market opens up, hopefully Austin will be back to a very solid growth trajectory," Flager said.
PitchBook and NVCA also see sunlight through the clouds.
“More realistic valuations, combined with a market awash in talent and new government programs designed to assist company formation in high-growth strategic industries, are all positive signs,” the report said.
Investors have been tangled in a liquidity crunch because so few startups have found lucrative exits. That means some VCs are foregoing larger deals to preserve capital. The report noted there were only 19 late-stage mega-rounds in Q1 this year, a steep drop from the 98 in Q1 2022.
“Not only has this widened the funding gap between startups seeking capital and investors willing to provide it, but it has also put downward pressure on deal pricing,” the report said.
Meanwhile, Austin ranked fifth in funding raised by startups with all-female founder teams between 2019 and 2023, the report showed. Over that time frame, women-led local startups raised $700 million. That put it behind the Bay Area, New York, Los Angeles and Boston, all of which had over $1 billion invested in women-led startups.
Here's a look at the top 10 Austin-area venture capital funding deals from Q1. In some cases, PitchBook also has pre- and post-money valuations.
- Colossal Laboratories & Biosciences: $150 million at a $1.4 billion post-funding valuation
- Coherent Logix: $85 million
- Alleviant Medical: $75 million at a $113 million post-funding valuation
- Overhaul: $73 million at a $373 million post-funding valuation
- ProsperOps: $72 million
- Atmosphere: $65 million at a $1 billion post-funding valuation
- INK Games: $40 million at a $120 million post-funding valuation
- Cart.com: $38 million
- SigmaSense: $38 million
- RapidDeploy: $34 million
The Austin deals accounted for the lion’s share of the top deals in Texas in Q1. Among the top 10 Texas deals were a $50 million round for Homz in Dallas, a $50 million round for Plus One Robotics in San Antonio and a $42 million round for MacroFab and $40 million for P97 in Houston.
In terms of exits, including acquisitions and IPOs, PitchBook only logged one Austin deal: InspireSemi, which exited for $30 million in a reverse merger.
