Show me the money - Venture Capital in 2023
The resilience of startup ecosystems worldwide
The global startup ecosystem has become a driving force for innovation and technological enhancement. Giants like Uber and Airbnb were once startups, while new kids on the block like OpenAI are taking the world by storm. Let’s explore what venture capital (VC) funding looks like in 2023, and where the future of startups goes from here.
Where’d the money go?
Just one year ago, it seemed like a new startup was announcing a $50m funding round every other day. Super-apps, driverless cars, clothes made out of mushrooms (yep, this is a real thing) appeared out of nowhere to much fanfare and much funding. The sky really was the limit, and it was an exciting time to be in the startup industry. According to Dealroom, Q4 2021 saw the most money raised ever, with a total of $219B raised worldwide in various rounds.
Fast forward 12 months, and funding is scarce. Q4 2022 saw less than half of Q4 2021’s record - only £93B raised. VC and angel investors are reluctant to part with their money, and for good reason - inflation, cost of living, and everything else that has been in the news.
Due to the inconsistency of self-reported funding rounds ($5m can be a seed round for one company and a Series B for another), Dealroom conveniently splits them into more general stages - startup stage ($0-15m), breakout stage ($15-100m) and scaleup stage ($100m+). The drop in funding after 2022 is especially pronounced in the scaleup stage (-47%) compared to breakout stage (-16%) and startup stage (-1%).
Diamonds in the rough
Funding in the startup stage is basically the same as in 2022, but how does it look when comparing it geographically? The chart below shows the percentage change in VC funding compared to 12 months ago, and there are some surprising entries at the top.
The typical startup countries have all been hit hard, with the UK (-27%), US (-35%) and even Germany (-42%) suffering. Africa and Europe on the other hand are doing extremely well - Croatia leads the way with VC funding increasing to over 350% of last year’s total, with Kenya not far behind at just under 300%. There are several key reasons for this, the first being lower costs. Salaries, real estate, taxes - the costs of business are much lower in these emerging tech hotbeds than in established places like Silicon Valley or London.
These countries’ governments have also realised just how much talent they have within, and many now have government schemes to help new startups with tax breaks, extra funding, and other incentives to help them grow. Some of the unicorn startups we know and love today started in these regions, such as Bolt (Estonia), Andela (Nigeria) and UiPath (Romania).
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Sectors
In terms of industry, every single one declined in Q1 2023 compared to Q1 2022. But AI is one that is bouncing back seemingly faster than all the others - and I mean faster. The chart below shows just how big of a rebound we could see in the next few quarters, as the value of deals (funding rounds) for generative AI startups announced within Q1 2023 but not completed exceeds $10B! For reference, the peak deal value came in Q2 2022 with $2.08B being invested - so we’re looking at a five-fold increase as everyone everywhere tries to get in on the act.
It comes as no surprise that the biggest announced deal for generative AI came in the form of Microsoft’s huge $10B investment into OpenAI, the creator of ChatGPT - which is why the actual number of announced deals is not that much.
Microsoft’s deal with OpenAI doesn’t mean it’s a one-and-done deal with AI startups. There are already 13 generative AI startups that have achieved unicorn status, with 5 coming in 2023 alone. The average time taken for these startups to reach unicorn status was only 3.6 years - while the average time of all unicorns is 7 years!
Unicorns are not that rare anymore in the startup world, but the real job is finding the early-stage startups that will become one. Which ones have caught your eye recently? Let me know in the comments!
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Miguel I love your stuff, keep at it! I’d like to see a focus on Tesla Co. Given Elon’s ingenuities their market expansion is pretty much endless imo, he can focus on boating for example and so many other products. 🤙