Generative AI and sustainability tech companies take majority of top VC deals as sector tanks
Global venture funding fell to $248.4 billion in 2023, the lowest since 2017, says the CB Insights State of Venture Global 2023 Recap report. Global deal volume also tumbled 30 percent year over year (YoY) to 29,303 in 2023, a six-year low. The declines were felt across most major global regions and sectors. However, the fintech and retail tech sectors saw modest gains in funding in the fourth quarter of 2023 compared to the prior-year period.
The report states that the fourth quarter of 2023 was the harshest quarter for global venture capital (VC) in six years. In the US, deal volumes were at a 10-year low, resulting in a chilling effect on the US tech ecosystem. US-based companies raised just 2,182 equity deals in fourth quarter – down 21 percent quarter over quarter (QoQ) to the lowest quarterly level since 2013. In the meantime, Canada saw funding grow 20 percent QoQ to $1.2 billion.
In addition, late-stage deal size has fallen more than 50 percent since 2021. Investors have become more selective and are shying away from large, late-stage rounds. The median late-stage deal size is now $21 million, a far cry from 2021’s $50 million. Similarly, the number of mega-rounds (deals worth $100 million) in the fourth quarter fell to its lowest level since 2017. Globally, deal volume is now less than half what it was at its peak in first quarter of 2022, as macroeconomic uncertainty continues to rattle investors.
“So unfortunately, it looks like we have not yet reached the bottom for venture funding,” says Benjamin Lawrence, managing analyst, industrials with CB Insights. “The venture downturn really accelerated in 2023, with global VC funding falling 42 percent to $248.4 billion, which is eight percentage points lower than a decline in 2022. This marks the first time that annual venture backed funding slipped below $250 billion mark since 2017.
“Context is really important here. Like during the pandemic, specifically the second half of 2022, we had an unusual market. We had very low interest rates which helped drive record venture levels, and that was not normal. So, it's not really wise to truly compare this year to those years, because there's such unique conditions economically. We need to look back to 2019; but, unfortunately, 2023 was lower than that.
“What further demonstrates the state of the week venture market is the fall and the average and median deal size,” adds Lawrence. “It's one thing to have less funding and deals but it's another to have smaller deals. Essentially, investors are much more deliberate and conscious with their money. Gone is the lavishness of pandemic venture funding with profitability really now taking precedent over pure revenue growth.”
The trend of decrease in deal size is common across all regions. “This tells us that what we're seeing is consistent globally.”
Down market reveals resilient sectors
Notably, the down market has revealed a handful of areas that remain notably resilient, including AI- and sustainability-focused startups to M&A deal flow in Europe.
With less than 200 VC-backed IPOs globally in 2023, the market for VC-backed IPOs remains mostly closed, especially in the US. Meanwhile, at 8,351 deals in 2023, M&A volume has fallen from a 2021 peak but remains elevated historically.
CB Insight’s report did reveal several ‘unicorns’ in 2023. The report identified 71 new unicorns – a seven-year low, and down 73 percent from 2022. The number of private companies reaching $1 billion+ valuations remain well below where it was even before the pandemic. However, 23 hit that mark in in the fourth quarter, a rebound from the previous quarter’s 14. Among 2023’s new unicorns, roughly half (35) came from the US. Asia and Europe contributed 18 and 12, respectively.
Generative AI and sustainability tech companies took the majority of top deals in the quarter. Investors are looking to ride the AI wave to potentially substantial long-term returns. This is fueling a funding frenzy among generative AI developers, which dominated the list of top equity deals in the fourth quarter, alongside sustainability tech players.
Lawrence says interest rates will be what helps move investments around again. However, even if the central banks do cut rates, he says, “I would not expect us to reach the pandemic level for quite a few years.”
For more information, visit CB Insights.
