Available venture capital for Orlando-area businesses took a huge hit this past quarter.
Nearly $94 million in venture capital was invested into businesses in second-quarter 2023 — a 71% year-over-year drop from Q2 2022's $323 million invested, said a report provided by PitchBook.
One possible reason for the year-over-year slowdowns in venture capital in Orlando and across the country, according to economist Sean Snaith, director of University of Central Florida’s Institute for Economic Forecasting: the failure of Silicon Valley Bank. Snaith called SVB a "venture capital-centric bank."
“In a larger economic environment that is increasingly uncertain, the question is, ‘Are we going to see a recession this year or early next year?’ That uncertainty is particularly impactful for venture capital. [Startup investing is] high risk by nature, so when outside factors compound that risk, people get a little hesitant to throw that money around.”
While early-stage companies are hanging onto their value, it's not the same for those further along, Winter Park-based Govo Venture Partners Managing Partner Rob Panepinto, told Orlando Inno.
"The reason for that is because fewer deals are getting funded; the best companies are getting funded. But late stage companies, for example, can't exit. There’s no public market for that. Both raising capital and exits get harder the further in that continuum you go, which is why we've seen more companies do an extended-fee round rather than go to Series A.”
An extension fee is a supplementary fee payable to lender of a loan beyond its original period. Series A funding is a type of equity-based financing considered the first major round of external funding startups can raise.
Panepinto’s advice to companies is to avoid being desperate to go to market since then, "You're a little more at the whims of the marketplace.” In Q2, Govo made a $500,000 portfolio company investment in Jacksonville-based Urban SDK Inc. as the lead of the $3 million round. Govo announced the launch of its venture fund in January, and is looking at several more investments in the coming months.
Other companies also are getting funded, which is encouraging, said Kyle Asman, managing partner of Windermere’s Backswing Ventures. In fact, his company recently funded a deal with OpenEye Analytics, Asman said, though he declined to disclose the amount.
“We focus on companies that are going to be profitable in 18 months, and that wasn't the norm. When I said that to people in 2020 and 2021 on our first fund, I got sideways looks — and now those are the companies getting funded.”
The challenge, Asman said, lies in getting cash flow positive, “because money is more expensive and the exit market's really slow.”
Asman foresees improvements. “As these general partners are able to return money to limited partners, they'll be able to get more funds out there and invest more dollars.”
Looking ahead, it's a good idea to take the long view, said Ken Hall, principal of Orlando-based venture capital firm DeepWork Capital LLC. "In an industry where we need to think in terms of years — and, sometimes, decades — we rarely get caught up in the monthly or quarterly numbers."
That said, it is noteworthy that there is a material and sustained increase in investment activity into Central Florida companies, Hall said. "This will facilitate economic development and investment returns for the region for years to come."
While investment activity remains well below the highs of 2021, there are positive signs heading into the second half of the year, he added. For example, there have been some notable mergers and acquisitions, the interest rate environment is stabilizing and gains in the public markets may help improve investor sentiment and stimulate early-stage investment activity, he said.
PitchBook’s key takeaways
It’s difficult to gain insights on a quarterly basis in a small market like Orlando as outliers can really play an outsized role, but here's a look at PitchBook's nationwide assessment:
- Deal activity has been flat over the past few quarters, remaining elevated above pre-2021 levels, despite the swift decline from the end of 2021 and early 2022 figures. Estimates showed early-stage and venture growth saw deal count increases in Q2, though deal value for both was much lower than anticipated. Many of these deals likely are being used to increase cash runways with as little dilution as possible. Note: Dilution occurs when a company issues new shares that result in a decrease in existing stockholders' ownership percentage of that company.
- Exit value is on pace to finish the year just over $20 billion nationwide, $50 billion lower than any other year in the past decade. Initial public offerings weren't viable options for VC-backed companies this year, despite the public markets showing positive returns on the year. Companies developed under the growth-at-all-costs mantra still need time to restructure their business models in a way that public market investors are willing to place a premium on, such as a well-developed path to profitability.
- The year is on pace for the lowest fundraising total since 2017 at $33 billion nationwide. More than 3,600 funds have closed — were fully funded — since the beginning of 2020, as a high number of funds are active in the market. Many general partners have pushed new fundraises out to 2024, as that's when returns likely will rebound.
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