Venture-capital activity slowed down some in the first quarter, but it’s also more in line with traditional VC levels.
Washington state companies saw a dramatic 60 percent drop in venture-capital financing during the first quarter, according to the quarterly Dow Jones VentureSource report being released Thursday.
But the funding numbers actually might be good news. The first quarter’s total for the state — $296 million in 27 deals — is much more in line with traditional venture-capital levels, said Greg Beams, a partner at Ernst & Young in Seattle.
Funding shot up more than usual in 2014 and 2015 because many mutual funds and other investors that don’t generally delve into venture capital were getting involved.
“It was a way for mutual funds to participate in the upside of private companies before they went public,” Beams said.
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That activity has slowed significantly as investors have been more hesitant about large startups with valuations of more than $1 billion, so-called unicorns. Many believe those companies are overvalued and need to be proved by a successful initial public offering, which the Seattle-area tech world hasn’t seen in quite a while.
Analysts and investors, meanwhile, have feared that funding levels would dry up, but that hasn’t come to be.
“To me, this says, ‘OK, that worry that the market had at the end of the year and the beginning of this year really didn’t come to fruition at this point,’” Beams said.
The number of deals remains strong, he said, and the first-quarter numbers, though down substantially from the first quarter of 2015, are 40 percent higher than the $211 million Washington companies raised in the fourth quarter of last year.
The biggest deals in the state fell in the usual industries, with one exception. Mod Pizza, a fast-casual chain based in Seattle, locked in a $32 million funding round in March, making it the second-largest round of the quarter.
The presence of Starbucks, Costco and the retail expertise of Nordstrom is helping the food and retail industries in the region grow, Beams said.
Kymeta, a mobile satellite company, inked the largest funding round of the quarter when it raised $62 million from Bill Gates and a few venture-capital firms.
The state’s top five deals rounded out with a $30 million round raised by IT services company Sendachi, a $16 million round by trucking-logistics startup Convoy and $15 million raised by Bellevue software startup Icertis.
Nationally, U.S. companies raised $13.5 billion in 883 deals in the first quarter, a 21 percent drop from the first quarter of 2015. Reports from PitchBook Data and CB Insights released this week show slightly different funding numbers, but the same trend. The amount raised has decreased but not as dramatically as some feared.
More funding activity may be coming. Dow Jones reports that 111 venture-capital funds brought in $13.26 billion in the first quarter, a 62 percent increase from the fourth quarter in the amount of money the financiers can use to invest in smaller companies.
Ernst & Young’s Beams said the rest of the year may hang on the actions of unicorns and whether the IPO market heats up.
The Seattle area, which has a relatively new startup boom compared to Silicon Valley, is not home to any unicorns. The lack of such high-valued companies may have caused some concern, but now works out in the region’s favor as the concerns turn toward those valuations.
“I would tell you the fact that we don’t have any startups valued at that level is a really good thing, because it is those level of investments that’s causing the big question mark,” Beams said.
If the IPO market grows friendlier, the region has a few companies closer to making that jump.