Like most other markets, Chicago's venture capital scene is much less active in 2023 compared with 2022 and 2021. Still, there are deals to be made, particularly in the health care space.
PitchBook Data's latest quarterly report on VC activity showed a nearly 27% decline in deal value for Chicago startups in the third quarter from the prior one.
While PitchBook VC analyst Vincent Harrison said some of the recent deals may provide a glimmer of hope for Chicago startups, they remain outliers as Harrison expects it to take some time for the market to thaw.
However, Chicago is starting to see some momentum on that front, especially when compared with national trends, with Chicago-headquartered VC-backed startups raising roughly $626 million in deal value in Q3, compared with $857 million in Q2 and $504 million in Q1.
"Broadly speaking, for the whole VC ecosystem, Q1 has performed better and has been more active than Q2 and Q3, so it's interesting to see that Chicago is more active later in 2023 as opposed to earlier," Harrison told Chicago Inno via email.
Still, in Chicago, the third quarter last year saw around $1 billion in deal value, illustrating the slowdown is far from over and continues to be driven by a number of factors including the lack of exit avenues and the exodus of many nontraditional VC investors.
Raising successfully in a down market
The slowdown has caused more startups, including Chicago-based ones like AMOpportunities, to seek extension rounds.
"There's been a decrease in median and average deal sizes for VC startups, particularly at the early, late and venture-growth stage. All of these stages saw decreases in deal sizes, meaning they are likely pursuing smaller rounds in order to raise just enough capital to continue operations, while potentially avoiding substantial dilution," Harrison said. "In many cases, the hypothesis here is raise what you absolutely need and try to wait for the fundraising environment to improve before going out and raising a larger round — this way you’re able to get the most bang for your back by maximizing (ideally) valuation."
For companies like CoPilot, leaning on existing investors has helped get them the funding they need. For others like Vivante Health, which raised a $31 million Series B round last month — one of the largest funding rounds for any Chicago startup in Q3 — strong margins and a clear "path to profitability" helped secure new funding in a down market.
"I think there was this period where everyone was only about growth, and people weren't taking a look at margin profile and things like path to profitability," Vivante CEO Bill Snyder told Chicago Inno. "When I think about the culture of the Midwest, a lot of the early-stage companies are thinking about that grander vision and that long-term goal, but at the same time, tend to be thinking about margin profile profitability burn and being good stewards of capital. In this environment that's very attractive to investors."
While VC funding continues to be scarce for Chicago startups, those in the health care space have done a little better than some of their peers. Of the 10 largest funding rounds of the quarter in Chicago, six of the startups are in the health care space.
Snyder said Chicago's well-established health care ecosystem makes it ideal for digital health care startups.
In terms of how they approached fundraising in 2023 compared with previous rounds, Snyder said Vivante was more targeted with the firms they reached out to.
"We were fortunate. We had a competitive bidding process and had competing term sheets and ended up oversubscribed for the round. It was the right time for us to raise because we had so much external interest," he said.
