Venture capital is available, but the trending numbers do not favor startups. Deal counts have plateaued and deal sizes are down from the recent peak in 2021. These market conditions are leading startups to change their strategies in order to make the money they have last longer, according to the second quarter Venture Monitor report from Pitchbook and the National Venture Capital Association (NVCA).

Breaking out biotech investments specifically, the report tallied $2.6 billion invested in 199 biotech deals globally in the second quarter, down significantly compared to the same period in 2022, when $4.8 billion was invested in 245 deals. In the U.S., Pitchbook and NVCA calculated $1.9 billion invested across 81 biotech deals in the second quarter compared to $3.3 billion invested in 93 deals in the same period last year.

The report counts more than 50,000 U.S.-based venture capital-backed companies—double the number in 2016. This group now faces a high capital shortage, the report said. Despite some sporadic IPO activity, the IPO window has not fully reopened. As of the second quarter, Pitchbook and NVCA estimate that there are 200 companies in the IPO backlog. However, some companies have more flexibility than others. When investments flowed more freely in 2021 and early 2022, many companies raised more than they needed. The overcapitalization enables these companies to delay moves to secure more financing, the report said.

Many startups are cutting costs and pursuing revenue generation to extend their cash and reduce the need for additional financing rounds, report said. The cost-cutting is apparent in biotech, with layoffs and restructurings rampant across the sector. But revenue generation isn’t an option for pre-revenue biotech companies heavily focused on drug R&D.

The second quarter marked the fourth consecutive quarter showing declines in both deal value and deal count at the angel and seed stages combined. The report notes this downward trend shows how the pressure from dried up liquidity and a difficult fundraising climate has trickled down to the earliest part of the venture lifecycle. With less capital available for startups, investors have an upper hand at the negotiation table.

“Companies that are unable to demonstrate progress toward the next inflection point via a clear growth path are getting passed on by investors,” the report said. “Against a backdrop of fundraising strain, the days of capital abundance are now in the rearview mirror.”

Many investors have advised their portfolio companies to cut their cash burn and extend their runway, the report said. The strategies companies are taking include reopening the last round and taking bridge financing. Under current market conditions, it can be hard for new companies to catch the attention of venture capital firms. During a market downturn, investors focus on helping existing portfolio companies and they reserve capital for making follow-on investments, which leaves them with less time and resources for new opportunities, the report said.

Later-stage companies continue to encounter challenges raising capital. VC firms are deploying capital with added caution, investing only in companies “that can weather the storm and have clear paths to high growth,” the report said. VC funds are also raising less money. The $33.3 billion raised by 233 funds in the first half of this year puts such financings on pace to reach a six-year low, the report said.

Despite the challenging economic environment, some areas of investor interest stand out. Artificial intelligence and machine learning as well as climate tech account for nearly half of the quarter’s mega-rounds of financing, demonstrating the market’s interest in these technologies, the report said. Looking ahead, Pitchbook and NVCA expect an uptick in merger and acquisition activity.

“We expect the pace of acquisitions to pick up through the end of the year as more startups expend what’s left of their cash runway and must either return to market to raise or hasten their exit timelines,” the report said.

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