🥶 Startup Funding Blues: A 2023 Dip, A 2024 Rise?

January 08, 2024

Week of January 8th, 2024

Welcome to AI8’s weekly newsletter, your ultimate source for curated insights and updates from the dynamic world of venture capital!

We've scoured the vast landscape of the web to bring you a comprehensive roundup of the industry’s top news articles, all in one convenient place. We keep you ahead of the game and in the know about all things related to the vibrant world of investments

🦄 STARTUPS

ROUNDS AND UNICORNS

Despite anticipating some ongoing struggles, venture capitalists are optimistic about 2024, expecting funding to have reached its low point, exit markets to recover, and a normalization of work practices:

  • Investors believe the market is undergoing a process of right-sizing, with shifts from large late-stage growth rounds to early-stage funding facing challenges

  • A surge in IPOs and increased M&A activity is expected to replenish the capital pool, offering relief to startups facing funding challenges

  • Many sectors, including tech, have faced reality checks with startups shutting down and significant layoffs. This trend is expected to continue as companies aim to achieve breakeven, even among well-funded startups

  • While the outlook for 2024 is generally positive, unforeseen events such as geopolitical issues, inflation, and the upcoming presidential election in November could introduce uncertainties and impact the private market

In 2023, North American startup investors faced challenges, concluding the year with the weakest quarter and a 37% decline in total investment ($144.3 billion) compared to the previous year. Q4 marked a notable downturn, with a total investment of $29.3 billion, the lowest in three years. Deal counts also dropped by 16% from Q3 and 31% from the prior year

  • Late-stage dealmaking in 2023, especially in Q4, experienced a downturn, with investors putting $15.7 billion into startups at Series C and beyond

  • Early-stage investment, including Series A and B, saw a decline in Q4, with approximately $10.3 billion invested in just over 600 rounds

  • Seed investment remained relatively stable in Q4, totaling $3.3 billion, similar to the previous two quarters

  • The exit environment faced challenges, with acquisition activity below peak levels, a dull IPO market, and setbacks such as Adobe scrapping a $20 billion acquisition

  • The largest M&A deal in Q4 involved Roche acquiring Carmot Therapeutics for $2.7 billion

  • Despite challenges, there are optimistic signals, including an end-of-year stock market surge, potential lower interest rates, and positive trends in sectors like AI, cleantech, and genetic medicine

INDUSTRY WORLDWIDE

In 2023, global startup funding experienced a significant decline, reaching $285 billion, marking a 38% YoY drop from the $462 billion invested in 2022. Funding cutbacks were evident across all stages, with early-stage funding down over 40%, late stage by 37%, and seed just over 30%

  • Despite most industries experiencing declines, AI stood out with an increase in global funding, reaching close to $50 billion, up 9% from 2022

  • Manufacturing and cleantech startups outperformed broader market declines, experiencing less than a 20% decrease in funding in 2023

  • Sectors experiencing significant declines include financial services (over 50%), e-commerce and shopping (60%), and media and entertainment (64%)

  • The fourth quarter marked the lowest for global venture funding in 2023, with quarterly funding totaling $58 billion, down 24% QoQ and 25% YoY

  • Seed funding in Q4 totaled $7 billion, down just over 20% YoY from $9 billion. Early-stage funding declined the most in 2023, totaling close to $23 billion in Q4, down 32% YoY. Late-stage funding in Q4 was 25% of the volume of the peak in Q4 2021, reaching $28.6 billion, down close to 20% YoY

🏦  ECONOMIC SNAPSHOT

The U.S. federal government's gross national debt has surpassed $34 trillion, reaching a record high. This comes earlier than pre-pandemic projections, primarily due to the economic impact of the COVID-19 pandemic

  • The government borrowed extensively under both the Trump and Biden administrations to stabilize the economy and facilitate recovery. However, the surge in inflation has led to increased interest rates, making it more expensive for the government to service its debts

  • While the current debt level has not hindered the economy, the long-term trajectory poses risks to national security and major programs, such as Social Security and Medicare

  • Both Democrats and Republicans acknowledge the need for debt reduction but differ on the methods, with Democrats proposing tax hikes on the wealthy and corporations, while Republicans advocate for spending cuts and tax reductions

In 2023, the U.S. economy experienced positive trends, with strong job creation, high consumer spending, and market gains:

  • The labor market remained robust, creating over 200,000 jobs in December and totaling nearly 2.7 million jobs for the year

  • Despite concerns about the Federal Reserve's efforts to combat inflation through interest rate hikes, consumer spending remained robust, with monthly retail sales consistently above $600 million

  • Inflation, though still a concern, cooled significantly in 2023, while wages increased, outpacing price increases

  • All three major U.S. stock indexes – Dow Jones Industrial Average, Nasdaq Composite, and S&P 500 – experienced considerable growth, with tech stocks leading

  • The Federal Reserve, after historic rate increases in 2022, moderated its approach, raising rates at four of its eight meetings in 2023

🧑🏿‍🤝‍🧑🏽 IMPACT & DIVERSITY

The landscape for female entrepreneurs is improving, with a significant increase in women starting their own businesses. In 2020, women accounted for 47% of new business owners, a notable rise from 29% in 2019. However, a funding gap persists, with only 2.1% of venture capital investments in the U.S. going to businesses founded solely by women in 2022

  • While the entrepreneurial environment has become more supportive, female founders still encounter discrimination in fundraising

  • Despite challenges, the funding rate for women-owned businesses rose to 41% in 2022. The average funding size for women-owned companies remains lower than that for businesses owned by men

  • Female founders emphasize the importance of standing up for their beliefs, embracing opportunities, projecting confidence, and learning to say no to both investors and opportunities that may not align with long-term goals

🚀 IPOs

Crunchbase’s article discusses potential venture-backed startups that might go public in 2024. Here are some key points by industry:

  • Enterprise Tech and Cybersecurity: Databricks – A San Francisco-based data and AI company with a valuation of $43 billion after a $685 million funding round in September 2023

  • Fintech and Banking: Stripe – A payments startup based in San Francisco with a current valuation of $50 billion, speculated to go public in 2024

  • Cleantech: Redwood Materials – A battery recycling company founded by former Tesla CTO JB Straubel, potentially eyeing an IPO in 2024

  • Retail and Travel:Shein – A Chinese fast-fashion retailer that filed confidentially for a 2024 IPO in the U.S. with a reported valuation of $60 billion

  • Health Tech and Agtech: Strive Health – A Denver-based kidney care provider with a focus on early detection, better outcomes, and lower costs, potentially considering an IPO

Despite a resilient US economy, the IPO market has experienced a drought, with only $28.2 billion in public listing value achieved in Q3 2023, compared to $511.9 billion raised in the first three quarters of 2021

  • Certain verticals within the venture capital ecosystem, such as SaaS, AI & ML, and fintech startups, are facing increased pressure due to the massive capital injections. These verticals have seen over $256.6 billion in investments, with a cumulative post-money valuation of $981.5 billion

  • VC firms and their Limited Partners are increasingly seeking returns given the substantial value created in these verticals, making the prospect of a reopened IPO window in 2024 highly appealing

  • PitchBook's VC Exit Predictor, as of Q3 2023, identifies a large number of startups with a greater-than-50% chance of achieving a successful exit. For example, 2,282 late-stage and venture-growth-stage SaaS startups are likely to exit successfully, with 194 of them potentially choosing IPOs over M&A

BrightSpring Health Services Inc., backed by KKR & Co., and Amer Sports Inc., have filed for their initial public offerings (IPOs) with expectations to raise at least $1 billion each. The success of these IPOs is anticipated to depend on the Federal Reserve's decisions on interest rate cuts and the stability of equity markets

  • After a two-year lull in IPOs, the market is showing signs of a potential revival, with companies like Reddit Inc., Shein, and General Atlantic reportedly preparing for IPOs in 2024

  • The performance of Smith Douglas Homes Corp., expected to price its offering later this week, will serve as an initial test for IPO activity in the current market conditions

  • While there is optimism for a robust IPO market, uncertainties related to geopolitical events and Federal Reserve decisions could impact deal flow

🗞️ AI8 VENTURES HIGHLIGHT

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8 Wealth Creation Essentials

Fraud Alert: How to Identify and Protect Yourself from Financial Scams

While fundraising as a fund manager, I have found out that trust is not earn easily. I might have faced some biases because I am too brown, culturally different and speaks with an accent. I rely on math, strategy, processes, and performance to present our fund, moving the conversation from how I look, to what I am doing. Why should someone trust me with their money, or even worse, their clients' money? I, also expect  that my counterparts do their jobs andunderstand the risk-reward profile of an investment in venture capital. Even as a top 1% performance firm with a super strict risk management strategy, less than 10% of your portfolio should be with us

Whether you're a seasoned investor, a finance professional, or simply someone keen on staying informed, this article is a must-read

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Happy reading,

AI8’s Research & Performance Team

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