Risk-averse venture capitalists continued to pull back on investing in U.S. companies at nearly all stages of financing in the first half of 2023. Like banks, VCs are tighter with their terms and using a higher bar to judge prospective business investments.
VC exits were also rare in the first half, according to the second-quarter Pitchbook/NVCA Venture Monitor, discouraging limited partners from putting capital back into the VC ecosystem.
While venture-growth and exit-stage companies were some of the first startups to feel the funding pinch, going back to early 2022, the “pressure from scarcer capital availability has trickled down … to the earliest part of the venture lifecycle,” stated the Pitchbook/NVCA Venture Monitor report.
In the angel and seed stage, first-half deal value fell to $6.8 billion from $14.5 billion in the first half of 2002.
Total capital invested in U.S.-based early-stage companies fell for the sixth straight quarter, to $10 billion, the lowest quarterly aggregate since the second quarter of 2020. Totaling up the first and second quarters, early-stage deals were down 54% in value compared with 2022.
The capital-demand-to-supply ratio for early-stage venture capital was at 1.5x, according to Pitchbook/NVCA, meaning that for every $1.50 sought by startups, only $1 is supplied from the investor side.
“To secure equity financing, companies need to show sufficient progress in product development, prove product-market fit, and demonstrate strong traction that it has already received,” the Pitchbook/NVCA report stated.
Liquidity events, or exits, remained elusive. Through the first half of 2023, Pitchbook/NVCA observed just $12 billion in exit value generated from 471 recorded exits, down from 785 transactions worth $51.5 billion in the first half of 2022.
“Immense amounts of capital are trapped in late- and venture-growth-stage startups hesitant to gamble on whether their financial performance can withstand the intense scrutiny of the public markets,” according to Pitchbook/NVCA.
As per historical norms, acquisitions accounted for the majority of liquidity events but unusually they also accounted for more than half of the exit value, at $6.8 billion.
The Pitchbook/NVCA report said, “VCs continue to urge their portfolio companies to seek liquidity, even if it means taking lower overall returns via an acquisition.”
AI Boost?
The fintech sector, which attracted a whopping $46 billion of U.S. venture capital in 2021, rebounded slightly on a global basis in the first half. Total funding value rose to $14 billion last quarter, the highest quarterly total since Q2 2022, according to S&P Global Market Intelligence.
But some large deals, including Stripe’s $6.9 billion funding round and Ant Group’s consumer finance unit's $1.5 billion in funding, masked a wider deterioration in the first half of 2023, said Sampath Sharma Nariyanuri, a fintech research analyst at S&P Global Market Intelligence.
A bright spot, however, could be forming in the sector of fintech companies that employ artificial intelligence. In the first half, more than 60 funding rounds globally totaling $1 billion involved such companies, according to S&P, most in the seed to growth stages.
The largest funding round for an AI-based fintech startup was the $100 million invested in AlphaSense, a Bloomberg and FactSet competitor that plans to deploy generative AI in its products, in April. The capital raising, led by Alphabet, valued AlphaSense at $1.8 billion.