Something is broken on Silicon Valley’s Sand Hill Road.
In a year in which tech stocks roared, with the
Nasdaq Composite
rocketing 43% higher, the venture capital business was in a shambles. Venture funding hit a six-year low in 2023, while the volume of deals in the fourth quarter hit its lowest level in a decade.
The valuation crunch that afflicted publicly held tech shares in 2022 has lingered in the private market, where funding has dried up. Venture investors remain concerned that private-market valuations are still too high. The window for initial public offerings remains firmly shut. Merger and acquisitions activity has been soft.
Total venture funding fell to $243.8 billion in 2023, the lowest since 2017, down 42% from the 2022 level, and 62% below the record $648.6 billion reached in 2021, according to a report issued Thursday by the research firm CB Insights. There were just 2,182 equity fundraising deals in the fourth quarter, the lowest quarterly level since 2013, and half the number recorded at the peak in the first quarter of 2022.
Meanwhile, the number of venture-backed initial public offerings in 2023 fell to the lowest level since 2013. Fewer than 200 VC-funded companies reached the public market, most of them in Asia. The U.S. IPO market remained largely shuttered.
For the year, CB Insights counts just 71 new unicorns, or companies with a private market valuation above $1 billion. That is a 7-year low and down 73% from 2022.
In another sign that venture investors are getting cautious, the fourth quarter saw just 78 so-called megarounds of funding, in which a company receives more than $100 million. It was the lowest level since 2017 and down from the peak of 429 megarounds in the fourth quarter of 2021.
Another shift in the environment has been a slowdown in investment by both SoftBank and Tiger Global, which together backed more than 500 equity deals in 2021. In 2023, they invested in a combined 46 deals.
Crunchbase, which issued its own report on the venture capital market on Thursday, noted that artificial intelligence was one of the few industry groups to see funding increase in 2023. AI companies raised $49.6 billion in venture capital for the year, up 9% from 2022. The single largest fundings when to the large-language-model companies OpenAI, Anthropic, and Inflection AI.
By contrast, investments in “Web3” companies fell 72% to just $7.8 billion. Likewise, funding fell 49% for financial services companies, 60% for retailers, and 63% for media and entertainment companies.
In a recent report on the outlook for the venture capital sector, the venture research firm Pitchbook said there were few reasons to expect a rebound in venture activity in the near term.
“The factors that led to the slowdown essentially remain in place,” Pitchbook wrote. “Interest rates and geopolitical tensions continue to be high; inflation has been relatively stubborn as the U.S. economy stays hotter than expected, and a recession is still a possibility, adding to the uncertainty.”
The most important factor, Pitchbook said, might be the sharp decline in price-to-sales multiples for publicly traded tech companies that unfolded in 2022. “These remain deflated compared with the multiples that private valuations were based on over the past few years, adding a high hurdle for companies looking to go public,” the report said.
Write to Eric J. Savitz at [email protected]
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