Philly VC falls 60% in Q3, thanks to market downturn and selective investors

Deal count and value were down in Philadelphia this quarter, but the region’s startup ecosystem isn’t an anomaly. 

Companies in the Philadelphia region raised almost $478.2 million across 86 deals, according to the latest Venture Monitor report, released quarterly by PitchBook and the National Venture Capital Association (NVCA). That’s about 60% lower than both Q1 and Q2 of this year, yet Philly still sees more deals and more capital raised than it did 10 years ago. 

“The sharp decline in deal value in Q3 highlights a more conservative investment environment, where investors are becoming more selective,” Emily Foote, a partner at Bala Cynwyd-based venture capital firm Osage Venture Partners, told Technical.ly. “While $478 million is still a substantial amount, it’s clear that investors are more cautious driven by the broader market conditions.” 

Nationally, deal count and value are down this quarter and venture markets are facing challenges, according to the report. VCs spent $37.5 billion on an estimated total of 2,794 deals across the country in Q3. This was down 2% from Q1’s $38.4 billion and 32% from Q2’s $55.5 billion.

Despite this trend, the report projects that the total number of deals this year will be similar to 2023, with total value expected to reach $175.2 billion. Philadelphia’s estimated deal value for the year is $2.65 billion, which would be higher than 2023. 

After a standout 2021 and 2022 for venture capital in Philadelphia, 2023 totals saw a significant dip. The first two quarters of this year suggested that the market was leveling out with $754 million over 116 deals in Q2 and $756.8 million over 108 deals in Q1. 

The slowdown in deal number and value doesn’t surprise Foote, as it is “likely a reflection of broader macroeconomic conditions,” she said. There have been higher interest rates, tighter capital flows and limited partnerships are changing strategies. 

Even though there is less venture capital activity now than there was two years ago, deal flow has generally increased over the last 10 years, according to Dean Miller, president and CEO of the Philadelphia Alliance for Capital and Technologies. 

The total deal count in 2014 was 231 and the value was $1.02 billion. Last year, it was 490 deals worth $2.37 billion.  

The Philadelphia Metropolitan Statistical Area, which includes Delaware and parts of New Jersey and Maryland, is also fifth in terms of deal count for this year, right behind the Bay Area, Los Angeles, New York, and Boston, according to Miller.

“That tells me that we still actually have a very healthy capital market through three-quarters of data in 2024,” he said. 

As always, it’s important to note: These figures may vary slightly after publication, as some deals aren’t accounted for until weeks after quarterly VC reports are published, or PitchBook may find errors in its data. 

Philly’s shining life sciences scene barely made a dent 

Only one of the top five deals from this quarter was related to the healthcare or life sciences industry, which is surprising considering the sector’s strength in the industry. Rather, the top deals were in business products and services, information technology, consumer products and financial services.

Over the last few quarters, there has been a pattern of more life sciences deals at lower amounts, which could be a reason the industry didn’t make the top five, according to Howard Lubert, area president of angel investor network Keiretsu Forum Mid-Atlantic. 

Nationally, life science deal counts are down and later-stage life sciences companies are securing deals, according to the report. 

This could also be a positive sign that Philadelphia’s startup ecosystem is diversifying, Foote from Osage Venture Partners said. But the region should be careful to not lose life sciences companies because they help retain talent. 

Some companies on this list appear not to be headquartered in the Philadelphia region. That’s something we often see, especially in Delaware, which has state laws that make it attractive for incorporation even if businesses mainly operate elsewhere.

Here are the top five Q2 2024 deals from the Philadelphia region: 

• Delaware-based Second Front Systems, a software security and cloud hosting platform, raised $70 million. 
• Music streaming platform Tune.fm, which is based in Philly, raised $50 million.
• Faye, which is a travel insurance platform located in Newark, Delaware, raised $31 million. 
• Drug development company Brenig Therapeutics raised $30 million. The stealth-mode startup is based in Wilmington, according to Pitchbook. 
• Haverford Pennsylvania-based 275 Funding raised $25.4 million. The company is an investment platform for accredited investors. 

Experts disagree about the outlook for the rest of the year

After this quarter, some experts think the market will turn around for Q4 into 2025. But Lubert said this is a sign of continued downtrends. 

Despite seeing an increase in companies coming to investment firm Keiretsu this year, the firm’s members are investing less money into each company and some are pulling out of the group altogether, Lubert said. 

Foote predicts the opposite, expecting to see a gradual recovery with a slight uptick in deal activity as the market adjusts to its new normal. The investor community is being selective, but that could lead to higher quality deals and startups focusing on efficient growth models, leading to stronger companies in the long term. 

The last two years, Q4 numbers were down compared to the rest of the year. Except during the peak of deal activity in 2021 and 2022. Philadelphia had $2.65 billion in deals in Q4 2021. 

Still, stakeholders hope that the market will settle after the presidential election and that there will be more interest rate cuts, setting 2025 up for continued growth, Miller said. 

“The current market presents challenges as we see in the Q3 numbers, but it also offers opportunities for resilient startups and discerning investors,” Foote said. “Philadelphia’s diverse economy and strong educational institutions give us a solid foundation for our startup ecosystem to weather this downturn and emerge stronger.”