Early-stage funding for startups is drying up as the coronavirus outbreak puts investors on edge, spelling trouble for large corporations looking to snatch up innovative technology and talent.
Capital from seed-stage funding, often the first significant source of cash for new ventures, has declined by about 22% globally since January, according to an analysis this week by CB Insights, a market-intelligence company.
The company puts total private-market funding for startups at $67 billion in the first quarter, down from an initial forecast of $77 billion.
The declines are expected to be especially sharp for startups in hard-hit sectors, such as retail, travel and hospitality, said Anand Sanwal, CB Insights’ chief executive. Startups developing capabilities in areas such as telehealth, autonomous delivery, disease diagnosis and virtual learning are likely to fare better, he said.
TripActions Inc., a corporate-travel startup valued at $4 billion as of June, this week laid off hundreds of employees to stem losses due to the pandemic. The Palo Alto, Calif.-based company raised funding of $250 million in June, led by venture-capital firm Andreessen Horowitz.
Startups are a major source of emerging technology and skilled workers for large companies, which have been on a shopping spree in recent years for promising ventures—especially those developing advanced information-technology tools, such as data analytics, artificial intelligence and robotic process automation.
Without funding, many startups will fail before catching the eye of corporate buyers, leaving a critical gap in the technology development ecosystem, industry analysts say. Startups also help nurture tech talent, which has been in short supply in recent years.
“The brakes have been slammed on funding until investors are able to create maps to navigate uncharted territory,” said Jonathan Simnett, director of technology-advisory firm Hampleton Partners. Startup acquisitions are like a form of research and development for IT departments at large corporations, he said.
Hampleton Partners recorded 1,289 M&A deals last year involving enterprise-software firms, up from 1,241 in 2018 and 1,050 in 2017.
Mark Schneider, chairman of New York Angels, an early-stage investment group, said roughly half of its members plan to decrease investments in startups that aren’t already in their portfolios, while 5% said they would cease investing altogether.
“Most angel investors are expecting valuations to come down substantially,” Mr. Schneider said. Startups that don’t lower their valuation expectations “will be at a substantial risk” of coming up short on funding, he said.
Ruth Foxe Blader, a partner at venture-capital firm Anthemis Group, said that “uncertainty, in addition to a total absence of face-to-face meetings, so crucial to early stage investing, will slow the pace of deployment.”
Some technology startups might prove to be more resilient, said Jonathan Lehr, general partner at enterprise-technology venture-capital fund Work-Bench.
“Fortune 500 companies need these new technologies more than ever,” Mr. Lehr said, citing continued corporate demand in areas such as document automation and customer management software, among others.
“Many skilled individuals will be laid off from startups due to macroeconomic reasons, and these people can be picked up by the Googles, Netflixes and Twitters of the world who will significantly benefit,” Mr. Lehr said.
Write to Angus Loten at email@example.com
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