Pre-Money: 2023 Venture Capital Recap & Reflection

KPIs

The year’s top performance indicators vs. last year

Reflections on 2023 and 2024

⏪ Recapping the year’s top takeaways

Venture’s year of sobriety: The party of the past few years came to an abrupt end on the heels of the Fed hiking rates, the war on inflation, public equity multiples shrinking, geopolitical instability growing and widespread doom prognostication. Unless you were an AI innovator, there wasn’t anywhere to hide. It might have been a needed dash of cold water on the ecosystem, but most will be happy to say goodbye to 2023. A few lowlights and big trends:

• Fundraising slowed again. An estimated 30% fewer deals got done and 45% fewer dollars were raised versus ‘22. Companies that managed to score capital did so on lower valuations than the prior round roughly 20% of the time.

• Even unicorns faltered. Companies valued above $1B snagged approximately 40% of what they got the prior year and less than 25% of what they raised in ‘21.

• IPOs were few and far between. With just enough thaw from a frozen 2022, Instacart ($CART; -28.69%), Klaviyo ($KVYO, -17.55%), ARM Holdings (ARM, +6.7%) and a few others got to market where they found mostly lukewarm receptions.

• Exits of all types proved scarce. Mergers and acquisitions (M&A) hit a 10-year low with less than $3 trillion of deals closed.

• Valuations of even the top private companies took a hit in most cases. Twitter was valued at less than 30% of its price at acquisition, and Opensea sunk 90% on its lead investors’ book.

• Companies downsized, again. To ensure their continued existence in a world of less capital, more than 1,000 tech businesses shedded 250,000+ jobs, 50% more cuts than the ‘22 total.

• A slew of startups shuttered. A reported 3,200 companies - more than 10% of the estimated 30,000 venture-backed businesses in existence - closed their doors, including unicorns like Convoy, WeWork and Olive Health.

• Funds went bye-bye as well. OpenView got the most press, but many managers slowed timelines or gave up on raising their next funds, and quite a few sat the year out in terms of investing.

• The leading bank built to serve startups, Silicon Valley Bank, evaporated one weekend in March. It required government intervention to avoid an ecosystem meltdown. Miraculously, this did not break any companies or funds, but left the ecosystem with fewer choices and bespoke services, and brought “treasury management” into fashion.

• Diversity is still a work in progress. Startup founding, funding and ownership data in Carta’s Equity Report once again shows Black, Hispanic and female founders and employees are underrepresented in the ecosystem.

There were silver linings: One might wonder how the year redeemed itself after all this carnage. It did so, though, on several fronts. Real talk: funding true innovation is a high-volatility, long term, power law-driven business, and ebbs and flows are expected. Tough times raise the bar for everyone, and create the necessary conditions for the impact the asset class can create. Companies and funds who win in today’s environment leave little doubt to their grit, focus and authenticity. Some notable positives:

• Artificial Intelligence took up all the available oxygen, in terms of product acceleration, funding and societal impact. OpenAI’s ChatGPT opened the door for countless chatbots to go from a curiosity to an accelerator of business and consumer workflows, and spur rapid progress in developer tools and capabilities. It also brought in a reported $1.6 billion in revenue in less than a year of monetizing.

• The funding story this year was all AI, all the time. The sector accounted for 25% of total funds raised, doubling its share from just the year before. Countless companies in generative AI (700+ at last count), producing Large Language Models (LLMs), apps on top of them, developer tools and more, raised capital - $30B+ in aggregate at last estimate - as the new platform took hold.

• Boardroom drama took center stage. The Thanksgiving soap opera in which Sam Altman was fired from OpenAI and then returned less than a week later was more than corporate intrigue. It signaled the deep divides emerging as opinions on the risks of AI to individuals and societies play out in boardrooms, the halls of congress and in lawsuits. The NYTimes copyright suit announced last week is the tip of that iceberg. As ChatGPT made appearances in South Park, the Republican Presidential Debates, organized labor strikes and (likely) at your family’s holiday dinner, it became clear AI is more than just a technology tool and will be relevant in broad issues in our society.

• High flyers in other sectors like Elon Musk’s SpaceX continued to soar, attracting considerable investment dollars as well not spoken for. The year’s biggest raises included fintech Stripe bringing in $6.5B, Fast-fashion company Shein getting $2B and vape maker Juul inhaling $1.3B along with several renewables and deep tech unicorns.

• Fraud was rooted out, or at least shown to have consequences. With Sam Bankman-Fried of FTX infamy joining fraudsters like Trevor Milton of Nikola and Elizabeth Holmes of Theranos in the slammer, there’s more hope that the next generation of bad actors will be deterred. And that investors will remember what diligence and governance look like.

⏩ Looking Ahead to ‘24

Venture’s first steps back to strength in ‘24: A more promising macro outlook is in place, and a soft landing expected by many. After the year’s trials and tribulations, there is nowhere to go but up for many funds and companies. Here are some things to expect:

• The IPO window will open wider. There’s a backlog of an estimated 250 companies that conceivably could go public, along with pent-up demand from a year that saw 3 tech IPOs when the norm is closer to 30. Look for some of these candidates (think: Stripe, Reddit, Databricks) to come out to market after the Fed has a chance to help with its March and April/May meetings. It will still be an uphill climb for most companies but even on extended runways the businesses need the capital, and the climate should improve enough for it to be provided.

• Secondaries are likely to start trading again. Secondary transactions help with transparency by providing objective pricing data, and closing deals was challenging in a year where spreads between bids and asks remain stubbornly wide. Look for this gap to narrow as sellers embrace reality and prioritize liquidity, and for the industry to gain efficiency with clearer pricing signals.

• Mergers and acquisitions will start to get back on track too. Software companies may end up getting gobbled up by Private Equity (PE) funds as growth rates slow and funds are flush with dry powder, providing founders and investors with more avenues to exits and liquidity.

• The early stages continues to be where investors are most active. Multi-stage funds are returning and nontraditional investors coming back after a couple years away. Investing in seed and pre-seed today lets them pick the unicorns of 2027 and beyond, without too much focus on current headwinds. And the risk-adjusted upside is tremendous even if the variance might appear too high.

The reckoning is still underway: We are not out of the woods, so the new year will likely be a mixed bag. In addition to the long tail of the challenges we saw last year, look out for:

• Elections are always a wildcard, and this year will be no exception. While it’s true that the broader market generally performs smoothly in election years, this year will put people on high alert. There’s elections not just in the US, but also in the UK and India. And the potential of AI to spur disinformation could make the 2020 Presidential Election look like child’s play.

• The “Great VC Resignation” will come fully into effect. Venture is a long game, and it’s started to dawn on some of the 3,000+ managers that they are not sitting on great performance and won’t be able to raise their next fund. Leaner teams and fewer funds may become the norm. And an even higher bar for businesses to get funded.

Deal Points

A few year-end items of interest

• Hard tech firm Countdown Capital is the latest VC to shut its doors, citing inefficiencies of a small fund in a capital-intensive sector

• Design software Canva is executing a secondary stock sale of $1 billion, rumored to be priced at last year’s valuation of $26 Billion

• Crowd-backed startups are more likely to still be around after the challenges of the past year, according to this report

• Shield AI announced $300M in equity and debt raised in a Series F to build autonomous defense tech

• The return of Indie.vc - an investor aiming to be the only capital a startup ever raises - and its recent fund closing hints at the tilt toward cash-flowing businesses

• Bill Gates’ annual letter touches on several areas in innovation and impact to look forward to

Carta’s VC round evolution by Series illustrating seed is still strong