Countywide layoffs cool

Carta Head of Insights Peter Walker said business-to-business software and biotechnology are some of the strongest sectors getting funded, according to the firm’s data, with medical device and health-related companies also showing strong performances. 

“Hardware is also establishing a pretty stronghold on the Peninsula,” Walker said.  

Despite the layoffs, the life science and biotech industry still seems to dominate the top venture funding rounds in the county. Since the start of the third quarter, the majority of the top 10 venture rounds for San Mateo County-based firms have been in the biotechnology and life science industry, according to Crunchbase data. 

South San Francisco-based ArsenalBio raised $325 million in September, making it the third highest venture round in the Bay Area last quarter, according to a CB Insights report. NGM Biopharmaceuticals, also located in South City, raised a $122 million Series A round — making it one of the top three highest venture funding rounds of any county-based firm. This also signals an industry bounceback after it failed a Phase II clinical trial in 2022, prompting a recent move to go private.  

Despite the large funding rounds and a slowdown in layoffs, many Peninsula-based biotech firms have previously expressed concern over reduced research and development tax credits as a result of the state budget deficit. Several have also been skeptical of several cities’ ballot measures that would increase business license taxes, citing the potential innovation hurdles that could come from the increased expenditures.

Companies in the consumer and financial technology industries have seen modest improvements in recent months as well, though they are still lagging life science performance and haven't bounced back since the pandemic, Walker said.  

Overall, last quarter’s venture capital funding levels in the Bay Area remained about the same as last year’s third quarter — $10.5 billion — and declined from $18 billion from this year’s second quarter. 

“Effectively, this year has been pretty flat since the start of 2024. Now, that’s in comparison to a not very good 2023. Obviously, that was a big decline from the previous years of boom times,” Walker said. “So things are maybe not getting extraordinarily better, but they're not getting worse either.”

But sheer funding totals aren’t the primary health metric of the technology and life science  industries. In previous quarters, massive rounds by Peninsula firms like Stripe and xAI skewed funding amounts. Even though the third quarter’s venture funding may look flat on the surface, the quality of early-stage deals looks promising, Walker said. According to Carta data, Bay Area medium-seed companies are raising $3.5 million rounds, with about $18 million post-money valuations.

“That's really healthy for a seed-stage company. That's historically very high,” Walker said. “The number of rounds that are happening is much less than the end of the peak, but the valuation of the cash that those companies are going to be raising is pretty healthy. And that's true from seed to Series A, even to Series B.”

Though the number of seed rounds Carta tracked in the Bay Area has dropped by 40% between the end of 2021 and 2024, it shouldn’t be taken as bad news, he added. Not only was 2021 an outlier in terms of exorbitant levels of funding, but the valuations of new startups are stronger than many that received early-stage investments just a few years ago. 

Part of that is due to the explosion of artificial intelligence firms, which require fewer employees than traditional technology companies, especially in the early stages. But the startups that do receive more funding now are more competitive, Walker said.  

“They're focused on growing, maybe not profitably at all times, but at least with an eye towards economics that make sense,” he said. “So smaller companies moving faster is definitely the name of the day.”

The impact of interest rates, which were cut by the Federal Reserve in September, also takes awhile to work its way through the ecosystem. And while a presidential election does create some uncertainty, impacting risk appetites and large firms’ decisions, it usually doesn’t affect the funding calculus for startup companies, as investors aren’t expecting returns for around another 10 years anyway, Walker added.

“Exactly who is in office right now is a little less important to you,” Walker said. “There's certainly a lot of talk about things like antitrust and things that affect the private markets, but it’s kind of speculation on which party would be better or how exactly that's going to change investor appetite. I'm sure it will have an effect. It's kind of difficult to know what is that effect.”

alyse@smdailyjournal.com

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