US stocks are climbing and second-quarter corporate earnings are coming in strong (so far, at least). Investors on Wall Street are optimistic.
Across the country, in Silicon Valley, the situation isn't quite as good. The tech titans like Apple, Amazon, Alphabet and Microsoft are doing just fine -- but their younger startup siblings are struggling to stay afloat.
High interest rates, an uncertain economic environment and a banking crisis that hit Silicon Valley-adjacent banks hard have led to a shortage of funds for early-stage companies and a lack of opportunity for late-stage companies to cash out.
Venture capital funding for startups across the globe halved in the first six months of the year, according to new Pitchbook data -- it would have been even worse, they said, if there hadn't been a big boost in AI investment.
More than 400 companies haven't been able to raise any new money since 2021, according to Pitchbook. Meanwhile, nearly 95% of all tech startups worth more than $1 billion aren't able to generate a profit at all.
The carnage is so bad that some insiders are calling this an extinction-level event for startups.
For decades Silicon Valley has been a dominant contributor to the US economy and an integral part of the country's culture. Could this really be the end?
What's happening: This spring Tom Loverro, general partner at venture firm IVP, tweeted that "the Mass Extinction Event for startups is underway." Startups, he said, were quickly becoming shutdowns. "Funding announcements get lots of headlines. Bankruptcy filings...less so."
Pitchbook and The National Venture Capital Association's most recent report on the industry also takes a pessimistic view of the situation.
Capital funding for young tech-driven companies has dried up significantly, and "the market could quickly hit a cliff if economic conditions worsen," the report said.
There are now more than 50,000 US-based, venture capital-backed companies -- a figure that has doubled since 2016. But there's a shortage of capital to fund them.
That pressure from diminishing capital availability means that companies at the seed stage saw their funding value decline by 26.3% in the second quarter of 2023 versus the first three months of the year, the report found.
More mature companies are also feeling the burn. Through the first half of the year 2023, companies generated about $12 billion in value from 588 exit events (that's when shareholders are able to cash out through an acquisition, IPO, buyout or merger). The full-year figure is now on track to come in as the lowest of the decade, according to the report.
"An immense amount of capital remains trapped in late-stage and venture-growth-stage startups hesitant to gamble on whether their financial performance can withstand the intense scrutiny of the public markets," found the report.
Merger and acquisition activity has dried up over the past year as dealmakers contended with rising interest rates and fear of a recession — investment banking powerhouses Goldman Sachs (GS) and Morgan Stanley (MS) have both reported substantial drops in revenue and profit on that end.
Fears of a softening economy and market volatility have also caused initial public offerings to dry up almost entirely. In 2022 the US IPO market fell 94.8% to $8 billion, a 32-year low. That downturn has continued; the total capitalization of new stock in the first quarter of 2023 declined by 60% relative to last year, reported the Center for Research in Security Prices.
That means there are a lot of startups worth a lot of money on paper, but they're worried that if they try to cash out they'll come up short of that number.
Why it's happening: Blame the Fed, as per usual.
Higher interest rates to fight inflation "is one of the clearest symbols of change in the market," said the report. The current federal funds rate is at its highest level since July of 2007. "This shift in the landscape has impacted all sectors and stages of the venture ecosystem with deals, exits, and fundraising all well below the high-water marks set in the past few years," says the report.
The banking stresses at the beginning of the year with the collapse of Silicon Valley Bank have also led to a drying up of credit available to startups. Extensive time is now going into treasury management at these banks, and they're more reluctant to lend money to unproven companies, found Pitchbook.
What it means: While startups are certainly far from extinct, there has been a serious culling in Silicon Valley that will likely continue on for some time. Just 19% of venture capital deals were made with startups based in the Bay Area this year; that's down from 22% in 2020.
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