Last year saw the lowest level of startup funding in five years, witnessed valuations fall drastically, and offered little hope for IPO contenders. But is that all now in the rearview mirror?
That’s certainly the hope from many of the startup investors and entrepreneurs we’ve spoken with recently, who say that even if things don’t come roaring back in 2024, they’re at least looking forward to a year of relative calm and predictability.
With that in mind, let’s look at what’s happening in the startup world as seen through seven charts based on recent Crunchbase data.
2023 ends on lowest note in five years
Venture funding has declined significantly since 2021, when it broke records.
Last year ended on a particularly low note, with Q4’s $58 billion in total venture spending the lowest quarterly amount in a year that itself clocked in at the slowest level of venture investment since 2018, Crunchbase data shows.
Even so, many investors we’ve spoken with predict 2024 will be a year of stabilizing — with the valuation drops and year-over-year declines of the past two years now largely baked into the market.
Even cybersecurity is not unscathed
Cybersecurity was once thought of as almost recession-proof. After all, hackers gonna hack, and companies and people need to protect their digital information.
But even cybersecurity funding has been hit by the venture downturn, with just $8.2 billion invested into startups in the space globally last year — a five-year low — according to Crunchbase figures. That’s almost half of the $16.3 billion invested in 2022 and down more than 64% from the record-setting $23 billion invested in 2021.
“What we saw in terms of cybersecurity funding in 2023 were the ramifications of the exceptional surge of 2021, with bloated valuations and off-the-charts funding rounds, as well as the wariness of investors in light of market conditions,” Ofer Schreiber, senior partner and head of the Israel office for cyber venture firm YL Ventures, told us recently.
Seed funding has remained fairly robust
Looking for a bright spot?
Turns out seed funding has held up pretty well through the downturn. Even as startup funding globally dropped 35% in 2022, U.S. seed investment actually grew 10%, Crunchbase data shows.
U.S. seed investment fell 31% last year, but even then, the decline was much less severe than at other funding stages.
And the median and average seed round size has grown significantly in the past decade, our data shows.
That said, seed startups that raised in 2021 going out for fresh cash now should expect their valuations to be trimmed, or at least to stay flat, investors say.
And the bar for raising a seed round is perhaps higher than it’s ever been.
“Most first-time founders especially, and the vast majority of founders generally — they have to get significant traction to be able to raise that same round they used to be able to raise,” said Michael Cardamone of New York-based seed investor Forum Ventures. “And a lot fewer of those rounds are happening.”
Web3 and the metaverse lose their luster
Web3 — the somewhat murky concept revolving around crypto, blockchain and a decentralized internet — was hot just a few years ago.
No more. Startup investors spent less than $7 billion on Web3 startups in 2023, Crunchbase data shows. That’s a far cry from the $33 billion they poured into the sector in 2021.
It’s a similar story when you look at funding to metaverse-related startups, another sector that investors went gaga for just a few years ago.
Despite the recent buzz around Apple’s new Vision Pro headset, it seems startup investors have lost interest — at least temporarily — in virtual reality, augmented reality and metaverse-related technologies.
Investment in the space in 2023 dwindled to less than $2 billion, Crunchbase figures show. That’s down drastically from the more than $5.7 billion invested each year in 2021 and 2022.
All eyes on AI
So where’s VC cash going instead? You guessed it: artificial intelligence. Startups that incorporate AI into their businesses raised close to $50 billion in 2023, Crunchbase data shows, making it the largest sector to show an increase in 2023.
Still, don’t expect things to stay as white hot in 2024, investors say.
“You are seeing some startups working through some legal implications even now,” Don Butler, managing director at Thomvest Ventures, told us. “I think some of that will lead to a cooling off when it comes to investment, especially in early-stage AI.”
M&A buyers play the waiting game
With funding scarce and IPOs scarcer, surely somebody’s scooping up all those startups desperate for cash or liquidity, right?
Not according to Crunchbase numbers, which show M&A dealmaking for venture-backed startups globally dropped by almost a third year over year in 2023. In the U.S., the figure hit a 10-year low.
What are startup buyers holding out for? Investors we spoke with say many buyers are flush with cash, but are likely waiting for valuations to drop even further from 2021’s lofty highs.
“I think in three to nine months you’ll see things picking up as valuations continue to drop,” Umesh Padval, a managing director at Thomvest, told us.
Illustration: Dom Guzman
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