It’s easy to find bad news about venture capital these days. Take for example this Wired article, “The VC Funding Party is Over“.
The glory days of VC are over, and if history is any guide, the tech bust should last through 2024 and beyond. In other words, the venture capital bust has only just started.
Edward Chancellor, Wired
Sounds gloomy, doesn’t it? In many ways, Edward is right. 2023 was a rough year for Venture Capital and for startups, and it might get even worse. That’s the case for most companies that are already in the market, especially if they raised funding at imaginary valuations before.
But as first cheque investor, I’m naturally optimistic. I believe there are a lot of problems need solving, my outlook is longer term and I invest in new companies (most of the startups that Remagine Ventures II will invest in don’t yet exist).
On a flight to the US this today I read several 2023 venture capital reports (CB Insights, Axios, Carta, Crunchbase, IVC Online and others) and tried to digest all the numbers. This post is divided into two parts: the first part is a data dump, in an attempt to summarise the reports, and the second part contains reasons to be (cautiously) optimistic. Spoiler alert: I believe that 2024-2025 will be an amazing time to invest in early stage startups.
2023 was a rough year for Venture Capitalists and startups alike
Plummeting deal volume (US down 40%, UK %50, Israel 60%) back to 2017 volumes. According to CB Insights’ State of Venture 2023 report, Q4 2023 was the harshest quarter in venture capital for the past 6 years.
Global venture funding fell 42% year over years to $248.8 billion and the US saw the lowest deal volume in a decade.
The industry’s largest investors significantly slowed. For example, Tiger Global, a crossover fund which was one of the most active venture investors in 2021 went from 194 deals in 2021 to a mere 20 in 2023 and has been trying to actively sell its positions in the secondary market at steep discounts to get liquidity. This chart by the WSJ shows the impact.
To put in context, the major crossover funds Tiger Global, Temasek, Coatue and Softbank participated in $148B of VC deals in 2021. In 2023 all crossover funds were part of just $34B of VC rounds. The biggest contributor of late-stage funding crunch.
As a result, 2023 has also seen a 43% decline in mega rounds of over $100M, though they still exist.
Valuations are down massively from 2021 peak, especially at the growth stage. According to Carta’s State of US startups 2023 report valuations for series A and up have been reduced by over 80% from Series A and up (it gets worse by stage). Seed valuations are down “only” 57% compared to Q4 2021.
VC funds struggled to raise new money (and sold parts of their holdings at steep discounts). According to Industry Ventures, the secondary market reached $105 billion in 2021 and is expected to have crossed the $138 billion mark in 2023.
M&A and exits were at the lowest level of the past decade in 2023. According to Pitchbook, the total M&A transaction of 2023 is the lowest seen in the past decade and just a quarter of the record high of $103B seen in 2021.
Most sectors were negatively impacted in 2023 in terms of funding amounts and deal volumes in 2023.
There were a few modest winners – fintech and retail tech startups saw double digit funding growth in Q4 2023. Fintech also saw 8 new unicorns in Q4’23.
And not a particular sector, but AI startups, in particular generative AI attracted close to $50 billion in funding last year, globally. That’s a 9% increase from the $45.8 billion invested in 2022. Most of that funding went to foundational models like OpenAI, Anthropic and Inflection AI which collectively raised $18 billion in 2023.
Finally, as I mentioned in my previous post on VC Cafe, a Unicorn status went from a status symbol to a liability in the 10 years since the term was coined, as startups struggle to justify ‘up round’ valuations.
However, there’s a light at the end of 2024
You can tell the market doesn’t believe that we’ve hit rock bottom yet. Many startups extended runway, cut costs and took on painful down rounds or expensive debt to avoid raising in 2023. Those ‘band aids’ are running their course and it might get worse (i.e. company closures, bad M&A deals) before it gets better. The hint that we have yet to see the bottom is the relatively low volume of PE investment. However, there is a light at the end of the tunnel.
Generative AI is game changer. Enterprise adoption of generative AI is still in its early days, but according to Accenture, it is expected to unlock an additional $10.3 trillion in economic value against the baseline by 2038. The rise of generative AI is expected to affect every vertical: health, education, fintech, gaming – creating opportunities for startups.
While the majority of generative AI funding was concentrated in a few companies, we’re seeing a rapid rise of open source models, which remove the barriers for new startups which lack deep pockets, vast data and expensive engineers. The 2023 open source generative AI survey by the Linux Foundation found that 41% of organisations expressed a clear preference for open-source generative AI technologies over proprietary solutions. It’s not just a cost consideration, but a desire for independence and neutrality.
The strategics (Google, Amazon, Microsoft, Nvidia etc) invested over $25B in generative AI startups in 2023 (source), outspending traditional VCs. Several corporates launched dedicated funds to invest in Generativ AI startups, including Salesforce Ventures and Visa. It’s reasonable to expect that M&A of generative AI startups will follow.
Rates coming down – The Fed is expected to cut interest rates this year, potentially thawing capital into startups, and opening up the IPO window (which will give funds/LPs liquidity).
The age old cliche continues to be true – there has never been a better time to launch a startup. New tech advancements means founders can do more with less, mass layoffs and fallen unicorns also mean experienced talent has become available and lessons learned from the crash means management teams are focused on responsible growth and unit economics vs. bliztscaling.
There are of course exceptions – the advent of AGI, which we seem to be rushing towards might make a lot of companies redundant. Global tensions are rising and we’re seeing a lot more scary media articles talking about the possibility of WW3. Supply chain, in particular around chips (which might be impacted severely in case of an escalation in Taiwan), can cause havoc in tech.
But barring those big tectonic shifts, I truly believe that category defining companies will get started in 2024 and 2025. And I’m excited to be in the market to support them on day one. Shameless plug, Remagine Ventures is open for business. If you’re building a category defining startup in Israel or Europe, we’d love to chat.
I’m a former general partner at google ventures, head of Google for Entrepreneurs in Europe and founding head of Campus London, Google’s first physical hub for startups.
I’m also the founder of Techbikers, a non-profit bringing together the startup ecosystem on cycling challenges in support of Room to Read. Since inception in 2012 we’ve built 11 schools and 50 libraries in the developing world.
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