Did the global venture capital market bottom out in the first quarter of this year? The second?
There’s good reason to believe that the massive correction in venture capital activity that we’ve seen over the past six quarters has run its course. More importantly, we’re seeing early indications that we have already seen the bottom of the private-market investing downturn.
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We’re amid a new venture normal. Since the U.S. venture capital market’s declines have moderated into what appears to be a comfortable investing value range, we feel the present moment is not an aberration. Instead, the market as it is today is what folks should expect going forward. That’s the conservative view.
We can also paint a brighter picture. So this morning, let’s hunt for more positive data points to consider and remind ourselves of a few structural matters in the global economy that could improve tech valuations and startup fundraising.
Green shoots for better days
Raising venture capital does not confer success upon a startup; building a large, growing and profitable business does.
Regardless, given how startups are often built and run, venture capital activity can provide a useful proxy for a startup’s accomplishment, as it provides a measurement for how optimistic private-market investors are about the businesses that they fund. Going one level higher, venture capital totals can be considered a reflection of trailing startup growth rates and how efficient they have been lately. From either perspective, more is better.
When we talk about venture totals and capital availability, we are discussing simple currency in motion. More usefully, venture totals tell us quite a lot about in-market views regarding the health of existing startups.
Now that we’ve established those correlations, let’s find some green shoots. What follows are eight data points and trends that indicate good reasons to retain some optimism that the worst days for startup fundraising are behind us for now.
Depending on how you count, venture capital totals have bounced off lows
With $60.5 billion raised in Q2 2023, global venture capital activity declined 13% from Q1 2023 levels, per CB Insights. However, without OpenAI and Stripe’s multibillion-dollar rounds in the first quarter, “Q2’23 funding would have grown 14% QoQ,” CB Insights wrote. Notably, PitchBook scooted the Stripe deal into the second quarter of its own dataset, which in turn shifts global numbers (it’s worth noting that PitchBook sticks to the domestic market).
Either way, if we excise the few outlying deals that were not really related to venture, the second quarter looks rosy compared to the first. That’s good!
Deal sizes are growing in parts of the world
While the median venture deal size declined in the United States ($3.5 million), Latin America ($1 million) and Africa ($1 million) in 2023 from a year earlier, deal sizes rose in Asia ($4 million), Europe (record high of $2.6 million) and Canada ($3.8 million, another all-time high), and stayed flat in Australia ($3 million), according to CB Insights. Not bad!
A modest mega-round recovery
Deals that clock $100 million or more are a mixed bag. Startups raised 108 nine-figure rounds in Q2 2023, compared to 92 in Q1 2023, but the value of those deals dipped to $23.3 billion from $32 billion, respectively, according to CB Insights. It sounds like a wash, right, to have more startups raising huge rounds but adding up to a lower amount? Sure, until you leave out some of the Q1 deals (OpenAI, Stripe) that aren’t really venture.
If you do that, it appears massive venture rounds actually had a pretty massive impact in the second quarter.
Given how many unicorns are starving out there, this really is good news.
We’re seeing more unicorns
What do you call a bump from 15 to 18? Modest improvement!
That’s how many new unicorns were minted in Q1 and Q2 2023 (per CB Insights data), respectively, making for a 20% gain. Sure, we’re still seeing significantly fewer new unicorns created this year compared to prior periods, but more new billion-dollar startups as the year scoots along is anything but bearish.
Deals are back on the menu
Enterprise M&A showed signs of life near the end of the second quarter. Major deals such as IBM’s acquisition of Apptio, Databricks’ deal to buy MosaicML, Reuters buying Casetext, and ThoughtSpot’s purchase of Mode Analytics indicate that a key exit window for startups is inching open.
Valuations are recovering
As the Fed slows down with the interest rate hikes, tech valuations are slowly climbing back up. Not by much and not too quickly, but there’s been enough movement to warrant a positive checkmark in our books.
Macro pressures are easing
Inflation is coming down, too, at least in the U.S. That should limit future interest rate hikes, which will push the needle in favor of growth-oriented companies like tech startups and away from safer and more boring assets. In turn, it could help tech startups’ valuations as well as their ability to do IPOs.
Tech layoffs are slowing down
We’re seeing a consistent decline in the number of tech layoffs. Fewer tech shops are being forced to axe staff en masse, giving us some more positive vibes to pocket. (We also talked about this on Equity earlier today.)
One could easily summon a contrasting list of negative trends, too. But I think that the bear case is clear enough at this juncture — all you need to do is go on Twitter (you shouldn’t, though).
Instead, the positive signals appear to be growing brighter, and that’s something to note.