Although funding for technology startups has dropped nationally amid a gloomy economic outlook, the picture is mixed for young companies in the Pittsburgh area.
Direct investment in local startups remains higher than a year ago, but it fell by half in the last three months after peaking earlier this year.
The total value of deals in southwestern Pennsylvania spiked to $241 million between January and March 2022, according to an analysis by the North Side-based nonprofit Innovation Works. But in the second quarter, the figure tumbled to $115 million — still significantly higher than the $88 million that entered the region during the same period a year ago.
“General trending is still upwards, but there is a bit of tightening happening,” Innovation Works’ chief investment officer, Ven Raju, said.
“We are beginning to see some [macroeconomic] headwinds in the form of rising interest rates, geopolitical uncertainty, inflation, quantitative tightening,” he said. “You're seeing the impact in the public markets. And you're starting to see indications of downward pressure in private markets.”
Innovation Works invests in startups and runs three business accelerators in Pittsburgh. Raju also serves as managing director for Riverfront Ventures, which finances later-stage companies in the Innovation Works portfolio.
While local startups generally continue to enjoy momentum in raising capital, Raju said, they are bracing for tough times as the economy cools.
“They're paying close attention to their cash burn rates and trying to ensure that they have sufficient capital,” he said. “If they don't have sufficient capital, they're going to the market sooner than they would have otherwise to preempt the market getting worse, and the ability to fundraise getting worse.”
Crunchbase reported that U.S. tech firms have collectively cut more than 28,000 jobs so far this year as they seek to contain costs. Strip District-based Argo AI laid off about 150 workers earlier this month.
Raju said late-stage startups, which had intended to go public within the year, are more exposed to market turbulence than younger firms. Downgraded valuations limit the amount of financing more mature companies can raise in public markets. In fact, initial public offerings essentially ceased in the second quarter of the year, the National Venture Capital Association and PitchBook reported last week.
East Liberty-based language learning app maker Duolingo debuted on the Nasdaq last summer. Since then, its valuation has dropped from $6.5 billion to under $4 billion. Self-driving tech developer Aurora Innovation, meanwhile, was worth $12.5 billion on the stock market shortly after it went public in November through a reverse merger with a special acquisition company, or SPAC. The Strip District-based company was recently worth $2.25 billion.
Raju noted that the majority of Pittsburgh startups are at earlier stages in their development. They specialize in diverse areas, ranging from artificial intelligence to robotics and life sciences.
“I think that that speaks to the resilience of the ecosystem,” he said. “So there's a number of sectors where we're seeing investments in the region.”
The recent dip in venture funding follows a decade of rising investments in Pittsburgh and elsewhere. Between 2012 and 2021, the level of annual capital flowing to local tech firms increased more than tenfold to $3.6 billion, according to research from earlier this year. Autonomous vehicle tech companies such as Argo and Aurora ranked among the largest fundraisers in recent years.
“Over the course of the last ten years, there have been significant global capital inflows into alternative asset classes, including venture,” Raju said. “So what we were seeing was an increase in deal volumes, deal sizes and valuations. Many regions benefited from this, including Pittsburgh.”
After soaring to record levels last year, the value of deals across the country fell more sharply in the last three months than it had since 2019. But while fundraising in the second quarter of 2022 slipped nationally compared to a year ago, it still exceeded pre-2021 levels, according to the National Venture Capital Association and PitchBook. In addition, venture capital firms in the U.S. have amassed a record $290 billion in funds that can be dispersed to young companies.
Raju cautioned that it is difficult to infer trends based on dealmaking over just the last six months. Investment data captures deals that were negotiated several months earlier, so they are lagging indicators, he noted. And locally, statistics for the first quarter of the year capture hefty raises: Industrial inspections firm Gecko Robotics closed on $73 million in March, and RoadRunner Recycling, a machine learning-based waste management company, secured $70 million in January, Innovation Works’ analysis of PitchBook data shows.
The three largest hauls in the second quarter were modest by comparison. They included $14.75 million for delivery driver assistance app Gridwise, more than $14 million for IRA customization firm iraLogix, and $12 million for database optimization platform OtterTune. Last week, iraLogix announced that it ended up raising $22 million in series C funding.
