After two years of record venture capital flows to start-ups, investors put the brakes on big investments this spring.
In Minnesota, the slowdown resulted in one of the weakest periods of capital raised by companies here in years. But local investors say the effects won’t last long.
U.S. companies raised $144 billion from venture capitalists in the first six months of 2022, according to a report released last week by Seattle-based investment research firm PitchBook. That’s down from $158.2 billion in the first half of 2021.
Most of the latest funds went to companies in California ($68 billion), New York ($18 billion) and Massachusetts ($12 billion). Minnesota companies raised $928 million.
There was a marked slowdown during the period from April to June. In those three months, Minnesota companies raised just $99 million. During the same three-month period in 2021, Minnesota companies raised $211 million. They raised $78 million during this period of 2020, at the start of the global COVID-19 pandemic.
Nationwide in the second quarter, companies secured $62 billion of a six-month total of $144 billion.
In Minnesota, 31 deals were completed in the first half of the year. That’s on par with previous years except for the record pace of 2021, when $2.7 billion was raised across 198 investments.
One of them was Minneapolis-based health benefits company Gravie, which recently announced an increase in its Series E funding round to $90 million, adding another $15 million to investors after closing an initial $75 million in March of this year. The additional cash came from existing investors and puts Gravie at $161 million raised since its inception in 2013.
The vast majority of Minnesota businesses that raise capital from investors are considered early-stage, which means they need relatively small amounts of money.
Nationally, venture capital numbers revolve around later-stage companies, which are about to go public or be acquired. These companies have experienced the greatest swings in valuations and capital flows.
“On the ground, particularly in Minnesota and the Midwest, there has never been a rise in valuations, not commensurate with the scale on the coasts,” said Ryan Broshar, partner at Matchstick Ventures, an investment firm operating out of Minneapolis. and Boulder, Colorado. “We’ve never had big swings twice the [valuation] come back down.”
In the Midwest, Matchstick’s territory also includes Wisconsin, Michigan, Illinois and Indiana, and the company typically writes checks between $500,000 and $1.5 million as pre-investments. priming and priming in startups.
In Broshar’s view, the seed and pre-seed deals in Minnesota are in line with previous quarters, and valuations are the same as they have always been.
Other Minnesota venture capitalists agree.
“You don’t have the $25 million valuation with an idea on a napkin in Minnesota like you might see in Silicon Valley,” said Brett Brohl, managing partner of Minneapolis-based Bread and Butter Ventures. “Those are the types of towers that get hit first and go first. Since we didn’t have them to start with, we’re not going to lose them.”
Minnesota’s environment can be an advantage for entrepreneurs who are capital-saving and less dependent on large sums of money to grow, he said.
“The change will be less drastic here than in other markets,” Brohl said.
And with more than $230 billion in committed capital awaiting deployment from thousands of funds across the United States, according to PitchBook and the National Venture Capital Association, the money well isn’t drying up. The speed of the flow that fills it only decreases.
“It’s not like committed capital is going away,” said Rob Weber, co-founder and partner of Minneapolis-based Great North Ventures. “It’s just going to be pushed forward. Eventually what will happen is that later funds like ours are going to become harder to raise because people are feeling a bit poorer right now.”
Bread and Butter Ventures typically invests in one company each month. The company isn’t changing its timeline despite what’s happening in the venture capital market, Brohl said.
“If you change based on the macroeconomics, you might miss the next Airbnb,” he said. “Great companies are built in all types of economy.”
The founders of Minneapolis-based Brown Venture Group aren’t slowing down either, with seed investments focused on startups led by Black, Latino and Indigenous entrepreneurs.
“We’re really accelerating,” said BVG co-founder Paul Campbell.
BVP has a pipeline of 20 startups and could add up to three more by the end of the month, Campbell said.
“What we’re experiencing is more introductions and conversations at this point, not less,” Campbell said. “We are seeing a recovery in activity, not a market-based decline.”
While Minnesota investors are in a waiting game, they said they will always rush in for good deals.
Nationally, the venture capital industry is expected to see price readjustments in deals continue until “certainty returns to the market,” experts said.
“Over the past quarter, the pace of fundraising has slowed sharply and valuations are beginning to correct,” said Pamela Aldsworth, head of venture capital coverage at JP Morgan, in a statement referring primarily to companies. in the start-up phase. “We expect valuations to fall across all investment stages as this cycle unfolds, and in our view this is a healthy reset of the bar.”
To survive, entrepreneurs reliant on venture capital would have to stretch their dollars.
“Be smart with your money and view every investment, every hire, as a high return on investment, and treat capital as if you were no longer able to raise more money,” Broshar said. “But if your business is growing and doing well, I wouldn’t hold back for any reason other than what your customers state.”