By Reuters | Jan. 11, 2024, at 12:38 p.m.
U.S. startup funding faced a significant setback, plunging 30% to $170.6 billion in 2023, as per PitchBook data. This decline, attributed to valuation resets amid rising interest rates, contrasts with the peak of $348 billion in 2021. Despite the AI frenzy, with one-third of investments directed towards AI startups, the overall funding landscape remains cautious.
Megadeals in AI, notably with OpenAI’s ChatGPT, stirred investor interest. However, AI labs, demanding substantial computational power, contributed to the decline in venture funding. Noteworthy investments in OpenAI and Anthropic constituted 10% of the total deal value in 2023.
The fourth quarter hinted at a potential market stabilization with a modest uptick in deal activity, totaling 3,934 deals. Yet, the year saw a surge in instances where startups secured funding at lower valuations than their previous rounds, rising from 8% in 2022 to 20% in 2023, indicating a broad reset in valuations for late-stage companies.
Ken Smythe, founder of Next Round Capital, noted the contrasting fortunes of AI and certain consumer concepts, with AI names trading at a premium while others faced a significant downturn.
Despite 723 unicorn companies, valued at over $1 billion, attempting to raise capital in 2024, uncertainties linger. While venture capital firms hold over $270 billion in unused capital, their fundraising pace slowed in 2023, raising concerns about meeting the capital needs of startups.
PitchBook data revealed a 60% YoY drop, marking a six-year low as U.S. venture capital firms raised $67 billion in 2023. This slowdown could potentially force 50% of VC fund managers to recapitalize in the next 12-24 months, according to David York, managing director at Top Tier Capital, signaling a challenging road ahead for the startup ecosystem.
Reporting by Krystal Hu in New York; Editing by Matthew Lewis
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