In this prosperous era, venture capitalists, angel investors, and billionaire evangelists had been pouring money into tech startups. It seemed like everyone was offered a pipeline of easy cash, as long as you had a fresh idea and the guts to slap buzzwords like "blockchain" or "AI" onto it. Valuations skyrocketed, and unicorns – startups valued at a supposed billion dollars or more – multiplied.
But now, high interest rates, an uncertain economic climate, and the financial crisis have struck banks around Silicon Valley hard. Early-stage companies are running out of money, and mature companies are struggling to exit.
For those seeking higher returns, better opportunities exist elsewhere.
Money invested into safer currency markets tends to yield higher returns than riskier startups. The Bloomberg U.S. Aggregate Bond Index, a widely followed performance benchmark for U.S. investment-grade bonds, delivered a return of 4.5% in November – the best monthly performance since 1985.
Startups are risky businesses. Sure, tech titans like Apple, Amazon, Google, and Microsoft are thriving – but their younger siblings are struggling to make it through the rounds.
So why bother putting in the effort for a startup if you can make money by simply holding onto your cash?
According to new Pitchbook data, global venture capital financing for startups has halved in the past year and is on track to reach a three-year low in 2023.
Early-stage companies are struggling to get off the ground, while mature companies are facing difficulties because there's a lack of money and exit opportunities (shareholders can cash out by selling large stock packages through acquisitions, IPOs, acquisitions, or mergers). Dilemma. If a company is privately owned, there are generally fewer opportunities to sell shares.
According to Carta, nearly 20% of startups have raised money at lower valuations than before in 2023, an increase of 5% from 2021. Since Carta started tracking data in 2018, third-quarter 2023 failures set a new record. A total of 543 startups have closed on the Carta platform this year.
This massacre was so significant that some insiders are calling it an extinction event for startups.
Some of these companies had previously raised massive amounts of money. High-profile names like WeWork, which raised $11 billion, and Convoy, which raised $900 million, have filed for bankruptcy in the last two months.
Others are hanging on but are standing still as their shareholders hoping they'll survive the storm and eventually be able to cash out. By the end of the first half of 2023, 588 individual exits had generated a total of $12 billion. The total value for the year is now on track to reach its lowest point in a decade, according to the report.
In the Pitchbook report, it was noted that "significant amounts of money remain invested in late-stage and venture growth-phase startups, and investors are wavering about whether their financial performance will stand up to the rigorous scrutiny of public markets."
What comes next: According to Pitchbook data, venture capital investors are sitting on a record backlog of uninvested capital.
Although financing and exit strategies for startups may be limited in the coming year, analysts say there are "some" promising signs for the future.
Allan Park, manager of the private equity platform Allvue, wrote in a recent report that investment in AI and biotechnology is still relatively strong. He added that IPO activity is slowly picking up and the European risk capital scene is seeing some promising fundraising activities.
However, he warned, "2023 will be a wild ride for risk managers and investors – and not necessarily in a good way."
According to additional reporting by Krystal Hur.
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Investors are seeing better returns in less risky asset classes despite the challenges faced by technology startups. To mitigate risks associated with investing in startups, analysts suggest focusing on sectors with strong potential, such as AI and biotechnology.
Sources:
[1] PitchBook Data, 2023
[2] Carta, Q3 2023 Report
