Investment in Pittsburgh tech firms plunges amid market turbulence, but there are signs of strength
After peaking in 2021, funding for Pittsburgh-area tech companies fell by 70% last year to $1.05 billion, a new study finds. The drop comes as no surprise during an economic downturn, though the research reveals signs of underlying momentum in the region’s innovation economy.
“Given the macro environment, the capital markets were effectively shut off for tech companies in 2022, and that's reflected in this data,” said Innovation Works CEO and president Ven Raju. But he added, "What we're seeing an uptick in is direct equity investment.”
Innovation Works is the most active seed-stage investing agency in southwestern Pennsylvania. It published the new research Thursday in collaboration with the Pittsburgh office of consulting firm Ernst and Young.
The study notes that Pittsburgh tech companies collectively raised $3.6 billion two years ago, a record for the region. Several local startups entered the public markets in 2021, and valuations remained high amid a booming economy. Although public financing dried up the following year, more than 150 businesses together drew $1.03 billion in early-stage investments to the region — a notable increase over the $894 million in early-stage inflows in 2021.
In addition, a record-high 74 venture capital firms funded local tech companies for the first time in 2022 alone, Thursday's report shows. Those venture funds comprise one-quarter of the 300 firms that have backed businesses in southwestern Pennsylvania over the last decade.
“These investors are [located] across the country and frankly, some of them across the globe,” noted Leon Hoffman, managing partner in Ernst and Young’s Pittsburgh office. “That has really contributed to putting Pittsburgh firmly on the map in terms of a very attractive place for [venture capital] funds to look for future investments.”
The share of investment that went to hardware and robotics companies fell to 39% last year. In each of the previous four years, those enterprises had accounted for the majority of tech funding in Pittsburgh. But in 2022, software and life sciences startups hauled in 38% and 23% of dollars, respectively.
“Generally, when [investors] are in choppy macro waters, they tend to retract a little bit in terms of longer-investment-horizon opportunities,” Raju said. “And I think that's reflected here for robotics, as it has been reflected across the country for robotics and other verticals that [have] longer-term horizons.” While therapeutic medical treatments and pharmaceutical drugs also are slow to develop, Raju noted that digital health startups, like software companies, usually grow at a quicker pace.
Investment in Pittsburgh’s tech industry exploded in 2019 amid the rise of autonomous vehicle companies such as the Strip District’s Aurora Innovation and the now-shuttered Argo AI. But data for the last 10 years shows more steadiness in the longer-term climb. Raju credits local research universities and Pittsburgh's relative affordability with helping to incubate a hub of tech companies in the area.
The new research shows that Pittsburgh universities rake in hundreds of millions of dollars in research funding each year, pulling in more than $1.5 billion last year. The region additionally won $63 million in federal funding last fall from President Joe Biden’s Build Back Better challenge. The money is meant to help local businesses to integrate robotics technologies into their operations.
Compared to the country’s most populous metropolitan areas, the area that encompasses Pittsburgh, New Castle, Weirton, W.Va., and part of Ohio ranked 19th in total venture dollars invested per capita, according to the study. The $264 committed per resident exceeds expectations, the research indicates, because the population in that region surrounding Pittsburgh is the 23rd largest in the U.S.
But Pittsburgh continues to struggle to generate venture capital of its own, the study notes. Last year, local funds had amassed $127.2 million in uncommitted money.
“We're still a bit underweight there,” Raju said. “So I think to the extent that we're able to further bolster that over the coming years, I think that will bode well for the [local tech] ecosystem.”
Thursday’s report says the region could grow its supply of resident capital as investors acquire more of its companies. The success of those deals would bolster Pittsburgh’s reputation and attract more investment in the future, the report says. And it notes that executives and staff at the acquired companies receive windfall gains that they then can inject into other startups in the area.
Last year, such exits took place at 27 local companies with disclosed values totaling over $1.9 billion — a small fraction of the combined $6.5 billion dollars generated by 20 exits the year before.