Tech Startup Funding Declines as Pandemic Drags On

In the first full quarter spanning the pandemic, overall startup funding in the U.S. and Canada dropped 12% from the previous quarter, a report finds

A scene from Fast's San Francisco office before remote working became the new normal.

Photo: Fast

Venture-capital funding for U.S. startups declined in the first half of the year, threatening a key source of information-technology innovation for larger companies.

Startup founders and executives say the pandemic is prompting investors to shy away from risky bets on nascent firms and untested technologies, and instead channel cash into proven ventures.

“Now is just an atrocious time to be looking to raise money,” said Domm Holland, chief executive and co-founder of Fast, an online-checkout software developer.

2020欧洲杯APPMr. Holland said the list of issues giving investors jitters includes a surge in Covid-19 cases in recent weeks, mounting economic uncertainty and an inability to meet potential backers face to face.

Apart from being a key source of emerging information technology for large companies, tech startups also nurture sought-after workers in areas such as data analytics, artificial intelligence and robotic process automation. Starved of funding, many of these ventures are likely to fail, leaving a gap in the enterprise IT ecosystem, industry analysts say. Though adding to the supply of individual IT job seekers on the market, fewer startups would shrink the pool of so-called acquihire targets for larger companies looking to add experienced workers to build out specialized tech units.

2020欧洲杯APPSan Francisco-based Fast, which launched last year, closed a $20 million funding round in March, following months of talks with investors including Stripe, Index Ventures and Susa Ventures, among others.

Since roughly February, most of the negotiations took place through videoconferencing, Mr. Holland said.

2020欧洲杯APPThe shift to virtual deal making, as a result of lockdowns and other efforts to contain the spread of Covid-19, is making investors even more cautious about where to put their cash. Fast had the advantage of conducting face-to-face meetings with potential backers before the crisis, Mr. Holland said: “There’s a magic to meeting people in person that can’t be replaced.”

Over the first half of the year, investors put a total of about $64 billion into startups across the U.S. and Canada, down 10% from the same period last year, according to data compiled by analytics firm Crunchbase Inc.

Domm Holland, Fast chief executive and co-founder.

Photo: Fast

In the April-to-June quarter—the first full quarter spanning the pandemic—startup funding dropped 12% to just under $30 billion from the first quarter, and 18% from a year ago, Crunchbase said.

The majority of deals closed in the second quarter were for $100 million or more, and tended to go to mature startups, the firm said. Among the largest, Waymo LLC, the driverless-car unit of Google parent Alphabet Inc., in March raised $2.25 billion from outside investors, led by private-equity firm Silver Lake.

Other large rounds include cellular-engineering startup Sana Biotechnology, which earlier this month raised $700 million in a deal led by Flagship Pioneering, ARCH Venture Partners and F-Prime Capital.

2020欧洲杯APPThough the total number of big deals was roughly unchanged from a year ago, those below $100 million dropped 31% from the first half of 2019, with second-quarter deals for early-stage startups dropping to roughly 700, less than half the volume of the opening quarter, Crunchbase said.

But some investors say they are finding funding opportunities in startups that are developing sought-after capabilities sparked by the crisis itself, such as advanced online payment tools or business website platforms.

As companies across all sectors ramp up business-continuity efforts to cope with shutdowns, startups focused on high-demand services, such as cybersecurity tools to protect remote work systems or health-tech capabilities, tend to be faring better than those in hard-hit markets like travel and retail.

2020欧洲杯APP Yancey Spruill, chief executive of cloud-hosting startup DigitalOcean, said investors are focusing on startups working on proven concepts that meet immediate needs for their customers.

2020欧洲杯APPDigitalOcean, which in May raised $50 million from Access Industries and Andreessen Horowitz, sells computer network and storage capabilities that enable users to quickly set up an online business.

2020欧洲杯APPMr. Spruill said many furloughed and laid-off workers are creating home-based businesses, fueling demand for cloud hosting. He credits the trend for driving the company’s fundraising round.

“People perceive risk as much higher now,” Mr. Spruill said. “No one wants to close a deal and see things fall apart later in the year.”

Sourcegraph, a code-search startup that raised $28 million in March from Craft Ventures, Redpoint Ventures, Goldcrest Capital and other venture-capital firms, drew attention as companies discovered the unexpected needs of software developers and coders working remotely, said CEO and co-founder Quinn Slack.

The company helps software developers to find and reuse bits of computer code for new applications. “If you can’t tap your colleague on the shoulder and ask where the code is and how it works, you need a tool to do that,” he said.

2020欧洲杯APPMr. Slack said many of its corporate customers deemed code search capabilities an essential tech tool, even as they cut IT spending in response to the crisis: “I think that made a strong impression on investors,” he said about the company’s latest fundraising efforts.

2020欧洲杯APPSourcegraph itself shifted to remote work in January, sending its 60 workers home, as part of a longstanding plan, Mr. Slack added. That gave the company a head start in securing effective remote-work capabilities—a move that impressed investors and customers who are assessing the ability of startups to weather the crisis, he said.

“Of all the crazy things going on, they don’t have to worry about us as a vendor,” Mr. Slack said.

Write to Angus Loten at angus.loten@kinofilmz.com

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