In good times, venture capitalists, angel investors, and billionaires tend to invest large sums of money into startups in order to earn high returns, but the situation in 2023 is not optimistic. Industry insiders say that 2023 will be an “extinction” year for technology start-ups.
Since the beginning of this year, against the background of high interest rates, intensified geopolitical conflicts, uncertain economic environment and the thunderstorm of Silicon Valley banks, start-up companies have faced difficulties in early financing, while companies in the later stages also lack opportunities to cash out, which makes the situation of these companies extremely difficult.
For investors looking to maximize returns, there are better opportunities in other areas. And in this environment, investors are more inclined to put money into lower-risk currency markets rather than high-risk start-ups.
According to the latest statistics from database analysis platform Pitchbook, venture capital funding for global startups has dropped by more than half since last year, and annual financing amounts in 2023 are approaching the lowest level since 2015.
Early-stage companies are unable to launch projects due to a lack of capital and exit opportunities (i.e., shareholders can cash out by selling large blocks of stock through acquisitions, IPOs, or mergers), and later-stage companies also run into financing difficulties.
Nearly 20% of startups have been forced to raise capital at lower valuations so far this year, according to equity management firm Carta, a sign of the market's extreme lack of funding.
The third quarter of 2023 saw the highest number of startup closures since Carta began tracking data five years ago. So far this year, 543 startups on the Carta platform have closed down.
The devastation was so severe that some in the industry called it an "extinction-level event" for startups. Some of these companies had previously raised large amounts of capital and failed to survive. Well-known companies such as WeWork, which raised $11 billion, and freight startup Convoy, which raised $900 million, have filed for bankruptcy in the past two months.
There are many more companies hanging on, but they are stalling, with shareholders hoping they can ride out the storm and cash out at a later date.
“A huge amount of money remains trapped in late-stage and risky growth-stage startups that are unwilling to gamble on whether their financial performance can withstand the rigorous scrutiny of public markets,” according to a report from PitchBook.
While funding and exit strategies for startups are likely to remain tight next year, analysts say there are some encouraging signs ahead.
Allan Parks, a manager at private equity platform Allvue, wrote in a recent report that funding for artificial intelligence and biotech remains relatively strong. He added that IPOs were slowly picking up and Europe's venture capital sector was "seeing some promising financing activity."