Venture Capital Market Drying Up Ahead Of New Year, Analysts Say

Aaron Morrison

Square Inc. signage covers the front of the New York Stock Exchange building to mark the company's initial public offering Nov. 19, 2015. Photo: Reuters/Lucas Jackson

The venture-capital market is tightening ahead of the new year, a sign that the dramatic increase in overvalued startups has caused funding for new ones to dry up, according to data reviewed by leading analysts. In fact, the funding of startups may be down sharply even in 2015, the New York research company PitchBook Data Inc. reported.

The firm's data indicated the amount involved in so-called first financings -- a type of professional funding of startups, excluding money provided by friends and relatives -- during the first 11 months of this year was $6.91 billion in 1,983 financing deals, the Los Angeles Times said. Over all of last year, the comparable figures were $7.5 billion in 3,368 financing deals.

"There are a lot of indicators that we've reached the peak of the [venture-capital] investment cycle," PitchBook analyst Daniel Cook told the L.A. Times. The decline in first financings "indicates that the future crop of VC-backed companies will be weaker than we're used to seeing," Cook said.

The slowdown has been caused in part by the lackluster performance of the U.S. equity market in 2015, according to the L.A. Times. Stock-market valuations provide helpful measuring sticks in determining startup valuations, especially because venture-capital firms eventually will look to sell shares in their startups.

Money made during such exits -- the sale of shares in startups through initial public offerings or via transactions with other companies or -- also is projected to decline this year. According to PitchBook, this money amounted to about $64 billion on 860 deals during the first 11 months of this year and about $94 billion on 994 deals over all of last year.

The demand for exposure to the venture-capital market remains strong, despite the outlook. Investors already have ponied up about $37 billion this year, an increase over the $34 billion they poured in last year, to get slices of successful startups such as Snapchat and Uber.

Meanwhile, John Lonski, chief economist at Moody's Analytics, told the L.A. Times that investors are stepping back from the highest-risk investments across the financial spectrum. The IPO market provides a good example: The value of IPO deals fell to $36 billion through Dec. 10 of this year from $95 billion last year, according to the research firm Dealogic.