After several years of investors pouring record amounts of cash into the local startup scene, 2022′s falling stock market and rising interest rates have started to slow the flow.
Massachusetts startups raised $4.9 billion in 238 deals in the first quarter, down from $7.9 billion in 285 deals a year earlier, according to a report on Thursday from PitchBook and the National Venture Capital Association. Despite the 38 percent drop, the amount raised in the first quarter of 2022 was still higher than any quarter prior to 2021.
Among the local companies that attracted backing in the first quarter, battery startup Factorial Energy raised $200 million, health care AI firm ConcertAI raised $150 million, climate tech company Verdox landed $80 million, and robot maker RightHand Robotics secured $66 million.
The drop-off was more pronounced among maturing startups getting close to going public, while investors remain excited about younger startups, Neeraj Agrawal, a general partner at Battery Ventures in Boston, said.
A big reason is that public tech companies including Boston stalwarts Toast, DraftKings, and Hubspot have seen their stock prices crushed over the past six months. More-mature startups are viewed through the same lens, while younger startups are valued more for their far-future potential.
“Most [private] companies will have to accept that there is a new valuation ... being dictated by the public markets, and we’re going to have to live within that,” Agrawal said.
However, following the typical seasonal trend, deal flow seems to be picking up in April. This week, fast-rising crypto startup Circle Internet Financial raised $400 million in new funding, and retailing software developer Salsify raised $200 million in a deal that valued the firm at $2 billion.
Salsify chief executive and cofounder Jason Purcell said he noticed a change from last year in the mood of some investors.
“I think we were fortunate,” Purcell said. “There were investors who may have invested three months ago that maybe were a little more risk-averse today. It ended up not impacting us, but I definitely would say it felt tighter.”
Others suggested it’s too early to tell. “It doesn’t feel like there’s much slowdown,” said Jamie Goldstein, founder of Pillar VC in Boston who concentrates on startups in crypto, AI, and biotech.
The decline in deals was less pronounced in other parts of the country, according to the PitchBook-NVCA report. Nationally, startups raised $70.7 billion in 3,723 deals in the first quarter, down 8 percent from last year’s $77 billion and 4,282 deals, which was an all-time record for first-quarter fund-raising.
But the stock market’s troubles are making it more difficult for startups to go public. Only three Massachusetts companies had IPOs in the first quarter, collectively raising $527 million, according to data from Ernst & Young. All three were biotech firms and all debuted in the first week of January. While the first quarter is often slower for initial public offerings, the drop-off this year was more intense. A year ago, seven Massachusetts companies raised $1.1 billion going public in the same period.
For venture capital funds, the first quarter also marked a slowdown. Funds based in Massachusetts raised $4.9 billion, down from $8.2 billion a year ago. Bain Capital announced its first crypto-focused fund in March, and Spark Capital announced two funds totaling over $2 billion in February.
One new target for some funds that can acquire already-public companies: buying startups that merged with special purpose acquisition companies. Their stock prices have dropped 60 to 80 percent in some cases.
The funds are “walking around going bargain shopping to pick up some of these [SPAC-merged companies] at a discount, at pennies on the dollars, and just start scooping them up,” said Adrian Mendoza, founder and general partner of Mendoza Ventures in Boston.