So far, 2023 has been a record-breaking year for venture capital—but not in a good way.
Startup funding has seen a record slowdown this year, quarter, and now, according to new research, month. And the lag has been taking a toll on VC firms’ performance.
According to new research from Prequin, VC funding is not only down, but so are indicators of how firms are performing. Index return performance has dropped 10.4% in the expansion-stage quarter over quarter, and 5.9% in the early-stage in the fourth quarter of 2022. Year over year as of the last quarter of 2022, index returns were down 20% overall. “As capital flowing into venture capital slows, firms will need to consider whether capital reserves for follow-on investments are sufficient if fundraising cycles start to get drawn out, a reversal from what we have been seeing in the recent past,” says Angela Lai, vice president of research and insights at Prequin. Exit values, a standard metric of success for a startup, have been down across the board.
April has proven to be a particularly rough month as global funding declined 56% since last year, according to new data from Crunchbase. Late-stage funding has fallen the most at 62% in a year-over-year comparison, while early-stage funding declined to 48% and seed dropped by 50%.
The volatile fundraising environment has impacted firms across the board but has been especially brutal for emerging managers with smaller funds. While the total number of funds closed dropped this quarter, the average fund size was larger and aggregate funding raised was slightly higher in the first quarter of 2023 compared to the last quarter of 2022, according to Prequin. During the first quarter of 2023, 144 funds closed, with only five funds making up half of the value of total fund closes. This means that smaller funds are receiving even proportionally less of the funding available as the market turns.
The failure of banks like Silicon Valley Bank, Signature, and most recently First Republic has also been detrimental to emerging, smaller funds. Monique Woodard, founder and managing director of Cake Ventures, which launched its first $17 million fund in January 2023, explained that she has historically seen the bigger banks as being less responsive and collaborative with newer funds. “Working with some of the larger banks has been a little bit more difficult for those of us with smaller font sizes,” she explained.
Yet a challenging environment hasn’t necessarily deterred new funds, surprisingly. The number of funds in the market is one metric that has shot up. The number of funds raising rounds increased by 5% over the first quarter. The most common stage for new funds was early stage given that the long incubation period for companies shields them from some of the impact of poor market conditions.
While the number of funds active is on the rise, deal activity continues to lag, bringing its fifth-consecutive quarter downturn even lower. Deal flow dropped the most in North America (53.1% decline in the first quarter of 2023) compared to Asia and Europe, which both saw deals decline overall by roughly 30%.
As avid Term Sheet readers already know, exit opportunities for venture-backed companies have become a rarity. Yet as the first quarter of 2023 came to a close, we can see how bad the carnage has been. Aggregate exit value has fallen by 48% quarter over quarter.
Is this as low as we can go? “We may be approaching the bottom of the market, although there is still the possibility of further downside before market conditions improve,” said Lai.
Big bucks for A.I.: One sector that has been able to pick up steam despite market conditions is artificial intelligence. Generative A.I. startup Cohere raised $250 million in new funding at a $2 billion valuation, according to the New York Times. The Toronto-based company was founded in 2019 by ex-Google researchers Aidan Gomez and Nick Frosst as well as Ivan Zhang. Investors in the Chat GPT rival include Salesforce, Nvidia, Inovia Capital, and Index Ventures.
See you tomorrow,
Lucy Brewster
Email: lucille.brewster@fortune.com
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Jackson Fordyce curated the deals section of today’s newsletter.
