As Investments Cool, Do Startups Miss Out?

The massive slide in investments for software startups — down 26% in the first quarter — shows just how much investors move in a herd.

When prices for startups were rising last year, investors piled in, afraid of missing out. But now that there’s economic uncertainty, they’ve scattered like birds before a storm.

If a Series A “is not absolutely exciting,” said Emergence Capital founder and General Partner Gordon Ritter, “we’ll sit on the sidelines.”

Software investments are the lifeblood of Silicon Valley. Software is now seeping into every industry, from insurance to manufacturing to health care–and great companies can be born out of tough times.

Consider Microsoft Corp., which started during the recession of the mid-1970s, or Google Inc. and Salesforce.com Inc., which survived the dot-com bust and went public in 2004.

But identifying promising startups is harder than it seems. NodeSource co-founder Joe McCann, whose company is enhancing the software development language JavaScript, said he combed Sand Hill Road in January trying to raise a Series A.

“There was a level of apprehension that was not the case when I was raising the year prior,” Mr. McCann said. “They said, ‘we’re dealing with the poor investments we made. We went outside our standard operating procedures; we have to go back to our roots.’”

Ultimately, NodeSource raised $10 million, but the round was led by RRE Ventures, which is based in New York and has a fund backed by Fortune 500 companies.

Mr. Ritter and other investors say a return to rational pricing is a good thing for everybody. But the situation raises the question of how many good startups will fail to find funding while investors take the time to cool down.

Write to Deborah Gage at Deborah.Gage@dowjones.com

First appeared at WSJ Venture Capital