It’s not looking good for tech startups in 2023. Furthermore, it hasn’t pleased the investors who gave them billions of dollars in funding. In prosperous times, tech startups attracted the attention of venture capitalists, angel investors, and billionaire evangelists. Anyone with an idea and the willingness to tag it with trendy terms like “blockchain” or “AI” could easily become wealthy. The number of unicorn companies, or startups estimated to be worth $1 billion or more, increased along with valuations.
However, due to high interest rates, an unstable economy, and a banking crisis that severely damaged banks in Silicon Valley, there is currently a lack of capital for early-stage businesses and little chance for late-stage businesses to exit.
There are better opportunities elsewhere for investors who want to get the most out of their money.
In this kind of climate, investments in less hazardous money markets typically yield higher returns than high-risk ventures. November saw a 4.5% return on the Bloomberg US Aggregate bond index, which is a frequently monitored measure of the performance of US investment-grade bonds. Since 1985, that represents the index’s best monthly performance.
With a startup, there are a lot of risks. Tech giants such as Apple, Amazon, Alphabet, and Microsoft may be doing well, but their younger siblings are having a hard time making ends meet.
Thus, when they can get paid to sit on cash, why would a potential investor put in the effort for a tech startup?
According to new Pitchbook data, venture capital funding for startups worldwide has decreased by more than half since last year; the annual fundraising figure for 2023 is approaching its lowest level since 2015.
Insufficient funding and exit opportunities, which allow shareholders to profit by selling a large amount of stock through a merger, acquisition, initial public offering, or buyout, are causing early-stage companies to struggle to get off the ground and late-stage companies to experience financial difficulties. There are typically fewer and farther between opportunities to sell shares when a company is privately held.
According to equity management firm Carta, approximately 20% of all startups have raised capital this year at a lower valuation than they had previously. Up from 5% in 2021, that is.
Since Carta started collecting data on the closure of startups almost five years ago, more have closed in the third quarter of 2023. 543 startups have closed on Carta’s platform so far this year.
Some insiders are comparing this to an extinction-level event for startups because the carnage is so severe.
Many funds had previously been raised by a few of these companies. Well-known companies like freight startup Convoy, which raised $900 million, and WeWork, which raised $11 billion in funding, have both declared bankruptcy in the last two months.
While investors hope they can weather the storm and take a profit later, other companies are still hanging in there, but they’re at a standstill. Individuals benefited from 588 distinct corporate exits totaling approximately $12 billion through the first half of 2023. The report states that the total-year figure is currently expected to be the lowest of the past ten years.