Even as Y Combinator reveals the latest startups in its cohort for this winter, we have poor news for founders: The global venture capital market shrank in Q1 2023, and it would have been even worse if it were not for a few mega deals, according to Crunchbase (disclosure: my former employer) and PitchBook reports. And here in the United States, things are looking grim.
Startups are not the only ones suffering, either. Venture capitalists are also seeing their ability to fundraise being hampered as they digest a raft of mismarked startup deals from the last boom and a dearth of exit volume.
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This dip in funding for venture investors implies that the current startup investing downturn may not turn course anytime soon.
The Exchange will have notes soon on what appears to be an expanding cohort of startups that may be the first companies to pursue IPOs when the market reopens. But for now, we’re stuck looking at money flowing into startup land, not the other way around.
There’s little good news to be found in this Q1 data, but don’t let that stress you. The numbers aren’t great, sure, but they’re also not quite as bad as we feared heading into 2023 last year. Onward!
Global venture capital is in retreat during Q1 2023
Crunchbase data indicates that total funding for startups in the first quarter globally fell to $76 billion from $162 billion from a year earlier. Given that the early 2022 months were not that far from the peak of the last startup cycle, this comparison is somewhat specious: We all know that things have slowed down since then.
Zooming in, the total value of startup investment in Q1 2023 actually rose by 1% compared to Q4 2022, which is a more recent and therefore more useful comparison. Up is good, right? Why are we carping about declines if venture totals are no longer pointing toward the ground?
Here’s how my longtime friend and former collaborator Gené Teare described the nuance in the first-quarter numbers, writing that the small gain in first-quarter dollar totals includes:
“a reported $10 billion investment into OpenAI — largely from Microsoft — and a $6.5 billion round for payments giant Stripe. Without those two large deals, Q1 venture funding would have been down even more dramatically, close to $60 billion.”
Strip out either of those deals — the Microsoft one is hardly a traditional corporate venture capital deal, and the Stripe round was raised not for growth, but reportedly for tax purposes — and the little bump that Q1 2023 brought to global venture totals simply disappears.
Crunchbase also reports that deal volume fell in the first quarter, continuing the downward trend that began back in Q1 2022 and has persisted ever since. The same dataset indicates that the value and number of seed, angel and early-stage deals declined compared to Q1 2022 and Q4 2022. Late-stage deal volume also fell across both time frames.
That’s the global picture. Let’s talk about the United States.
Down home venture results
Given the prominence of the United States’ venture capital market, you might not expect much difference between the two datasets in Q1 2023. You’re right if you think that way.
First-look data from PitchBook for the U.S. indicates venture capital dollar volume in Q1 continued to decline, which means we had yet another quarter when less money was invested in fewer deals compared to the previous three months. Deal value in the country has now declined every quarter since Q4 2021. Deal volume peaked in Q1 2022, but it has fallen every quarter since.
We’ll dig into more granular U.S.-specific venture investment data soon. To prevent ourselves from going on for too long this morning, however, let’s talk about two other data points: venture fundraising and exit volume.
- Per PitchBook, a mere “$5.8 billion in exit value was closed in Q1” in the United States. That, the company notes, is less than 1% of the total value of venture-backed exits recorded in 2021. Put another way, if exit volume for venture-backed companies stays at the same level for the rest of 2023, we’d see less than 4% of 2021’s results this year.
That’s a disaster. So much money went into startups in the last few years that seeing exits go to effectively zero means every investor’s performance metrics are slipping, and their marks on prior deals are becoming more specious with time. The opening of the IPO market will prove clutch for startups able to finally trade publicly; for their backers, the liquidity will have the same value as dirt in “Waterworld.”
- We presume that the above liquidity crisis is part of the reason that VC firms are finding it hard to raise funds. PitchBook reports that some $11.7 billion was raised by 99 funds in Q1 2023. Two of those funds were worth $1 billion or more, which is a stark departure from the average of nine funds that were worth at least that much per quarter last year. What’s more, last year saw an all-time record of $170.8 billion raised across 892 funds. Such numbers now firmly belong to a different era.
Summing up, the global venture capital market is in retreat, and the picture is worse if you exclude the few mega-mega-deals that probably don’t really fit the “venture” profile anyway. Exits are garbage and VCs are raising far, far less capital than they used to. Across every metric that we care about, the startup investing game is getting less healthier every quarter.
For the startups launching this week at Y Combinator, it’s a dramatically changed, more difficult market than what the cohorts of yesteryear had to contend with.