Venture capital financing activity for startups in Massachusetts in the first quarter fell to the lowest level in seven years, as the collapse of Silicon Valley Bank added another drag on the state’s innovation economy.
Only 162 startups raised backing from VC funds in the quarter, down from 304 deals in the first quarter last year and the least since the third quarter of 2016 when 155 deals closed, according to data from market tracker PitchBook and the National Venture Capital Association. Local startups raised a total of $3.0 billion in the first quarter, down 55 percent from the same period a year ago and the lowest total since the end of 2019.
Several factors combined to make fundraising tough for startups at the beginning of the year. While tech stock prices have recovered somewhat after plunging in 2022, they remained well below the heights of 2021. And investors have shown no interest in new startups going public. Further, higher interest rates have slowed the economy and made risky investments like startups less appealing. Finally, the rapid collapse of Silicon Valley Bank, a major player in the local startup economy, delayed some deal-making in March, venture capitalists said.
The bank’s demise “clearly caused severe strain and distraction in the system, although we believe short term,” Lars Albright, a partner at Unusual Ventures in Boston, said.
Among local startups, the largest funding deal in the quarter was by biotech firm Aera Therapeutics, which raised $193 million in February.
Another reason for the dropoff has been reduced activity from two huge players, Japanese tech and investment firm SoftBank Group and New York hedge fund Tiger Global Management. The two firms upended the entire VC ecosystem in prior years by making rapid, multibillion-dollar investments in individual startups. But both firms have suffered losses as the market turned.
As a result, the drop in VC funding has been more pronounced among larger startups that are close to going public— the category favored by SoftBank and Tiger. Early-stage companies saw less dramatic pullbacks, some VCs said.
At Founder Collective in Cambridge, which invests in early-stage companies, first-quarter deal making was steady compared to last year, cofounder Eric Paley said. And while the firm invests all over the world, Founder Collective was pitched by the most Boston-based startups than in any quarter in the past four years, he said.
“The greater Boston tech ecosystem boasts some of the world’s top human capital,” Paley said. “Hopefully, our opportunity set from [the first quarter] is a sign of green shoots quickly emerging in the slowing market.”
The decline in VC funding at Massachusetts startups mirrored the decline nationwide, according to the PitchBook-NVCA data. Nationally, startups raised $37 billion in the first quarter, down 55 percent from the same period in 2022. And Massachusetts held its third-place ranking among all states, surpassed only by California and New York.
Aaron Pressman can be reached at firstname.lastname@example.org. Follow him on Twitter @ampressman.