A Brief Review of the VC Landscape in 2023: A Year of Adjustments and Opportunities
The year 2023 marked a pivotal moment for the global venture capital industry, which navigated significant uncertainties and challenges reflecting broader economic trends. As a venture capitalist, witnessing these changes has been both challenging and enlightening, offering a unique perspective on the search for alpha amidst uncertainty.
A Year Marking Six-Year Lows
2023 stands out as a year when the global VC industry encountered several six-year lows, illustrating a noticeable contraction in venture funding and deal activity. According to CB Insights, global venture funding experienced a sharp decline of 42%, dropping to $248.4 billion, the lowest level since 2017. This downtrend wasn't isolated to annual figures alone; the fourth quarter of 2023 saw a quarter-over-quarter decline of 24% to $51 billion, marking the industry's worst quarter since the first quarter of 2017. The United States, a significant player in the global VC ecosystem, mirrored these global trends, with total funding declining 37% year over year to $138 billion.
Deal activity also saw a notable decrease, with the global deal count falling 30% year over year to just over 29k deals in 2023, marking the lowest in six years - compare this to over 41k deals in 2021. This decline was even more pronounced in the US, where the VC ecosystem experienced a 10-year quarterly low of 2,182 deals in the fourth quarter of 2023.
Early vs. Late Stage Funding Dynamics
In response to these challenging conditions, more investors pivoted their portfolios towards early-stage deals, including seed/angel and series A rounds. These now comprise 70% of the overall VC deal share, the highest in over a decade. This shift reflects a strategic adjustment, prioritizing the potential for high growth and innovation in the face of market volatility and uncertain exit prospects. Despite the broader market contraction, the median early-stage deal size remained stable year over year at $2 million. In contrast, late-stage deal sizes saw a significant reduction, with median values more than halving from $50 million in the tech boom of 2021 to $21 million in 2023.
The fourth quarter of 2023 highlighted a continuing trend of declining funding levels, with global early-stage funding totaling approximately $23 billion, a 32% decrease from $33 billion year on year. Late-stage funding, though also declining, saw a somewhat smaller year-on-year decrease of around 20%, from $35.3 billion in Q4 2022 to $28.6 billion in Q4 2023. These figures underscore the cautious approach of additional due diligence that investors are taking, especially in later-stage investments.
The uncertain economic landscape and market volatility have significantly impacted exit prospects for VCs. The year 2023 saw only 170 VC-backed IPOs globally, a 10-year low, with many companies experiencing tempered IPO performance and down-rounds. High-profile examples include Instacart, Klaviyo, and Arm in the US, which faced challenges in realizing their expected market valuations.
Despite the prevailing gloom, certain sectors have shown resilience, particularly in the fourth quarter of 2023. AI and sustainability tech companies emerged as bright spots, attracting significant investment with the promise of long-term gains. Global funding to AI startups reached close to $50 billion in 2023 (almost 20% of total VC funding), marking a 9% increase from $45.8 billion in 2022. This interest in AI and sustainability underscores a broader industry trend towards investing in technologies that promise transformative potential and societal impact.
Looking Ahead
Overall, the market continues to favor investors, with more opportunities to invest at favorable valuations. However, the intense interest in early-stage deals has maintained frothy valuations in this segment, reflecting ongoing optimism about the potential of emerging technologies and startups. As venture capitalists, the challenge and opportunity lie in navigating this complex landscape, balancing risk with the potential for groundbreaking innovation.
2023 was a year of recalibration for the VC industry, marked by significant shifts in investment patterns and a renewed focus on foundational principles of value creation and growth potential. As we move forward, the lessons of 2023 will undoubtedly shape our strategies and outlook. We maintain a positive outlook on investable opportunities, coupled with a cautious approach to valuation and deal-making, and are excited about uncovering the next wave of transformative companies.
Written by our lovely intern, Harshita.
