Venture groups have faith in city startups

Pittsburgh making headway with other regions

Venture capital investments in Pittsburgh startup companies reached $716.8 million last year, up 21% from $592.2 million in 2021 and driving the total amount invested in the city’s new technology companies over $1 billion, a new report found.

The $1.02 billion invested in 150 Pittsburgh companies in 2022 rose 15% from $894 million invested in 2021.

Of the total amount plowed into local startups, $716.8 million came from institutional investors; $248.3 million came from corporates; and $64.2 million came from angel, preseed or seed investors. Novasenta, KaliVir Immunotherapeutics and OtterTune were among the top early stage deals last year, which included Series A fundraising.

New software and life science companies attracted the lion’s share of capital, claiming 23% and 39% of the total amount invested, up from 5% and 20% respectively in 2021, according to a report by the Downtown office of Ernst & Young LLC and North Shore-based Innovation Works Inc., a nonprofit, state funded small business accelerator. And for the first time since 2017, investment in life science and software companies combined to exceed investments in local hardware and robotics sectors.

Noteworthy in 2022 was the increase in the number of venture capital groups investing in Pittsburgh companies, said Leon Hoffman, office manager at Ernst & Young’s Downtown office.

Over the past 10 years, 300 venture capital groups invested in Pittsburgh including 74 new groups in 2022, Mr. Hoffman said.

Outside interest by venture capital groups indicates both interest and confidence in what’s happening in the city’s startup community, said Catherine Mott, Innovation Works board chair and managing partner at Blue Tree Capital Group LLC, a seed-stage investor based in Wexford.

“To attract money from outside is a real feat,” she said. “The key success factor in venture capital

deals is relationships; they’re investing in people, not just the business.”

The good news for Pittsburgh startups came during a tough year for venture capital overall and within weeks of the failure of Silicon Valley Bank in San Francisco — which backed nearly 50% of tech and life science startups in the U.S. In the past year, quarterly capital invested in startups fell more than 60% and deal counts slipped nearly 25%, according to PitchBook, a Seattle-based market analytics company.

On March 10, federal regulators seized SVB after clients withdrew $42 billion, leaving the bank insolvent.

But yearly investment comparisons don’t tell the whole story because of the long runway many startup companies need to begin generating revenue.

“Year to year there can be anomalies,” Mr. Hoffman said. “We really look at longer term trends, which paint a more wholesome picture of what’s happening in the market here.”

From a longer lens, Pittsburgh fared well, with more than 129 companies exiting between 2012 and 2021, including autonomous truck driving company Aurora Innovation Inc. and edtech company Duolingo. The value of exiting companies, ones where owners sell out, was at least $21.3 billion in 2021.

The failure of Silicon Bank will have little effect in the Pittsburgh area, Ms. Mott said, but the city’s weakness in the startup economy is the dearth of locally based venture capital.

Because of the close relationship between investors and entrepreneurs, it’s not unusual for promising Pittsburgh startups to be asked to move closer to venture capital outfits in Boston or Silicon Valley.

University of Pittsburgh Chancellor Patrick Gallagher and others have expressed similar views over the years, saying the lack of local investment hobbles the economy. The IW report notes that although a number of new venture funds in the Pittsburgh area have been created in recent years, including 412 Ventures, Black Tech Nation Ventures and Magarac Venture Partners, “local venture capital funding remains very low.”

Pittsburgh lags behind its peers in Philadelphia, Raleigh, N.C., and other cities, where 25% to 30% of venture capital comes from local sources, Innovation Works President and CEO Ven Raju said.

“We’re still well short of that, but the trend suggests we’re making some headway,” he said.

Last year, local venture groups had $127 million available to invest, money that is sometimes called “dry powder.” That’s an increase from $73.6 million in 2021 and $60.2 million in 2020, according to the report, a 110% increase in two years.

“This community has to invest in itself, investors at all stages of growth,” Ms. Mott said. “It’s hard to get people to do this because it’s a high risk investment.”

“Entrepreneurs will go to where the capital is,” she said.