Economic headwinds continued to put pressure on venture funding deals nationwide and in Arizona during the second quarter as investors focused their capital deployments into what they consider the strongest companies with clear paths to high growth, according to a Pitchbook report.
Arizona companies inked 31 deals totaling $147.6 million in the second quarter, compared to 31 deals and $644.3 million raised in the first quarter, according to the Venture Monitor report, released Thursday by research firm Pitchbook and the National Venture Capital Association.
Valley startups secured 28 deals totaling $143.8 million in the second quarter, compared to 25 deals totaling $633.5 million in Q1.
Misaligned valuation expectations, increasing use of bridge rounds, and a temporary pause on series C and greater mega-rounds could all be contributing factors to the smaller size of capital investments than in prior quarters, said Benjamin Brockwell, partner at Valley-based AZ-VC.
Scottsdale real estate technology startup Lessen, however, closed a $500 million round of debt and equity funding in the first quarter, explaining the reason behind such a stark difference in quarter-over-quarter total funding amounts, he added. In fact, when Pitchbook first reported its Q1 numbers in April, it didn't include Lessen's funding round, so the total was only $131.5 million.
"This is a rare exception to the pause in mega-rounds. If we remove this outlier from the data, there is a slight uptick in capital invested from Q1 to Q2," he said. "We are, however, not in the business of ignoring outliers, and our excitement grows as we continue to see breakout startups in Arizona. It speaks to the quality of founders and companies in our backyard."
Phoenix metro companies representing software-as-a-service, consumer products, life sciences, e-commerce, cloud technology and health technology were among the state’s top investments in Q2 2023.
Gilbert-based software application development company Nx Cloud raised the greatest amount of capital in the second quarter with a total of $48.2 million in two separate late-stage deals that closed in April and June, according to Pitchbook.
Other top Phoenix-area deals include:
- $17.5 million in an early-stage round for Scottsdale-based Chewsy
- $14 million in a series A round for Scottsdale-based evolvedMD
- $11.1 million in a late-stage round for Phoenix-based Calviri
- $10.5 million in an early-stage round for Carefree-based Laundry Sauce
- $10 million in a late-stage round for Tempe-based Serva Energy
- $6.3 million in an early-stage round for Phoenix-based YellowBird
“For the tech community in Arizona, we see positive momentum for companies on the earlier stage side, who are seeking either seed or series A equity rounds. This part of the sector has stayed more resilient compared to companies needing to raise much larger equity rounds,” Tyler Wilson, Arizona technology banking relationship manager at Wells Fargo, said. “Companies seeking series B and series C are receiving much more scrutiny around prior valuation levels and their path to reduce high levels of cash burn, which is no longer sustainable in the current environment. “
National VC activity declines in Q2
The current economic landscape impacted all sectors and stages of the venture ecosystem in the second quarter as deals, exits, and fundraising fell well below the “high water marks set in the past few years,” according to Pitchbook.
The shuttered IPO window and record-high capital demand-supply ratio dampened late stage deal activity nationwide, resulting in just $13.9 billion in deal value across an estimated 1,071 deals in Q2 2023.
Startups are cutting costs and pursuing revenue generation to increase runway and reduce the need to raise funding rounds. Local banks have become "crucial partners" for startups looking to decrease their dependency on a single financial institution, Pitchbook's report said.
Pitchbook reported 26 late-stage mega-rounds of deals above $100 million nationwide in the second quarter.
Seed funding value was $2.8 billion in the second quarter, dropping 27.5% from the previous quarter due in part to startups intentionally delaying fundraising, investors shifting priorities and rounds taking longer to close.
Early-stage funding for startups reached $10 billion across 1,360 deals in the second quarter, marking the 11th consecutive quarter that funding declined nationwide, according to Pitchbook. The second quarter, however, was the most active ever recorded in terms of deal count for early-stage funding with a high number of investors looking to that area of the market.
Despite a sluggish second quarter for venture capital deals, Phoenix-area startups and venture capital firms are continuing to build upon the momentum of the local tech ecosystem.
In 2022, AZ-VC launched its $110 million fund geared toward Arizona-based startups. The fund, led by chairman and tech veteran Jack Selby, is the largest in the state. It aims to invest in companies that already achieved a product-market fit.
In conversations with investors, startups are explaining how they are solving challenges in their target markets rather than touting how much cash they’ve raised, illustrating a shift back to growth and industry impact, AZ-VC's Brockwell said.
To date, AZ-VC has six startups in its portfolio, four of which were added in the past six months with more on the way, Brockwell said.
“So we haven't slowed down," Brockwell said. "We expect to pick up way ahead of our prior year schedule."
