The venture capital ecosystem is still "navigating choppy seas” as companies nationwide continue to face a challenging exit environment, but Arizona is showing positive signs of dealmaking activity, according to a recent report.
National venture capital deal activity rose to $55.6 billion across 3,108 deals in the second quarter. That marked the largest quarterly total since Q2 of 2022, when funding reached $77.6 million, according to a report released Thursday by PitchBook and the National Venture Capital Association.
Arizona companies inked 32 deals totaling $360.5 million in the second quarter, compared to 38 deals and $181.4 million raised in the second quarter of 2023, according to PitchBook’s Venture Monitor report.
Valley startups secured 29 deals totaling $248.9 million in the second quarter, compared to 32 deals totaling $173.7 million in Q2 2023.
“I think we're definitely optimistic about a rebound both nationally and in Arizona,” Tyler Wilson, Arizona technology banking relationship manager at Wells Fargo, said. “But I think what we're seeing is companies and investors really starting to shift their focus.”
During the pandemic peak, startups were focused on growth “at all costs,” driven in part by low interest rates and record high valuations. Now, companies in Arizona and nationwide are “getting back to basics,” he said.
“They can articulate how taking that investment from a VC will ultimately achieve not just growth, but also a path to sustain profitability,” Wilson said.
Companies representing software-as-a-service, biotech and stratospheric exploration were among the state’s top investments in the second quarter.
Tempe-based biotech company Nectero Medical raised the greatest amount of capital in the second quarter with a $96 million series D round that closed in May, marking the largest deal in Arizona this year.
Other top Phoenix-area deals include:
- $25 million in an ongoing series D round for Tucson-based stratospheric balloon company World View
- $21 million in a series A round by Peoria-based Datavolo
- $17.5 million in a series B extension round by Phoenix-based Dot Compliance
VC market investing in 'experience'
While there’s been an uptick in second quarter dealmaking activity, it may be too early to claim a rebound from the pandemic funding frenzy, according to PitchBook.
Despite “high profile” public market debuts of Rubrik and Ibotta, the IPO pipeline has not yet entirely opened up. Only 37 companies have gone public this year with just 14 in the second quarter, according to PitchBook.
“The market likely has bottomed out, and companies that raised two to three years ago and had pushed out financing through cost-cutting measures are returning to the market for subsequent financing,” PitchBook wrote.
The initial flood of investment in early-stage blockchain, autonomous vehicles, virtual reality and artificial intelligence-related startups has “largely abated,” and now venture capital firms are focused on supporting their most promising companies amid a challenging exit environment.
“We are seeing follow-on investments,” said Dan Mahoney, an angel investor and partner at Phoenix-based law firm Snell & Wilmer. “For a number of funds, I think they are circling the wagons on existing portfolio companies that show promise, so they can get them to some liquidity event to return some capital.”
Nationwide, early stage funding for startups reached $3.3 billion across 863 deals in the second quarter. Late stage deals totaled $23.5 billion across 888 deals in Q2, buoyed by cloud AI startup CoreWeave’s $8.6 billion series C round, according to PitchBook.
With a challenging path to an IPO, companies are turning to mergers and acquisitions to exit, although that market has also been impacted by interest rates and economic uncertainty over the past couple of years.
Valley companies, however, have inked some large acquisition deals this year, including Resideo Technologies' $1.4 billion acquisition of Snap One and Blue Yonder’s $839 million acquisition of One Network Enterprises.
“The M&A market is definitely picking up. Very large M&A continues to be negatively impacted by regulatory scrutiny and interest rates,” Mahoney said. “Middle market M&A, which is what you typically find in Arizona, is not affected in the same way.”
The U.S. venture market has become "incredibly investor friendly” as more protections are built into term sheets. Deals are taking longer to close and venture capital firms are conducting thorough due diligence of potential deals, according to PitchBook.
There’s been a notable trend, however, toward larger check sizes, pointing to market players “placing a premium on confidence.”
“Whether it is with established managers or founders with a successful track record, the market is investing in experience as it charts a new path forward,” Pitchbook wrote.
