Venture capitalists pulled back from making new bets at the end of last year. The number of deals fell to a nearly two-year low because of worries that there was too much froth in start-up investing.
In the fourth quarter of 2015, the amount of money funding private companies fell by 30 percent to $27.3 billion from the previous quarter, according to a report from the research firm CB Insights. Deal-making dropped 13 percent over the same time period to 1,743 transactions, a level not seen since the first quarter of 2013. Investment activity was also down from the fourth quarter of 2014, during which $27.7 billion was invested in 2,013 deals.
Investors are debating whether they have overpaid to invest in start-ups like the disappearing messaging app Snapchat and the online storage company Dropbox, especially as mutual funds that hold shares of privately held companies have begun to mark down the value of their stakes.
“We were struck by how quickly the chill hit funding and deal activity,” said Anand Sanwal, chief executive of CB Insights. “The reality for start-ups that are fund-raising is that the environment will be much more challenging than it has been.”
The pullback is a somber end to a year in which investors had largely been exuberant. In 2015, venture funding peaked in the third quarter at $38.7 billion, according to CB Insights. In total, funding for all of 2015 hit $128.7 billion, nearly as much money as was deployed in 2013 and 2014 combined, the data show.
The shifting investment landscape at the end of last year also took a toll on the number of mega-rounds, or financing rounds of more than $100 million. There were 39 mega-rounds in the fourth quarter, down from 72 in the third quarter, according to the report.
Mega-rounds have helped create dozens of so-called unicorns, privately held companies valued at more than $1 billion. These companies, which now number more than 140, have come to define the recent Silicon Valley boom.
But the unicorn trend, too, was more muted at the end of last year. According to the report, nine companies crossed the $1 billion valuation threshold in the fourth quarter, versus 23 the previous quarter. CB Insights attributed the decline to the overall slowdown in deals and mega-rounds and said that concerns about a private company bubble also made investors more cautious.
“The upshot of this in the near to medium term is that a lot of well-funded unicorns who were lighting money on fire will look to reduce their cash burn by shedding head count,” said Mr. Sanwal. “Early-stage companies will run into difficult times fund-raising unless their metrics are very, very strong. Leverage is shifting back to investors.”