Global startup financing reaches a five-year low as AI outpaces expectations

Global startup financing reaches a five-year low as AI outpaces expectations

Global startup funding ended 2023 at $285 billion, the lowest level in five years, according to a recent Crunchbase study.

With this amount, venture capital investors are continuing their pattern of prudence, as seen by the notable 38% decrease from $462 billion in the prior year.

Notably, 2023’s last quarter was especially slow. According to the research, the overall deal volume was down 33% year over year and 15% quarter over quarter, with quarterly funding totaling $58 billion, down 24% and 25%, respectively, from the previous year.

Additionally, Crunchbase discovered that there were significant drops in financing at every stage of startup funding:

In 2023, angle and seed funding—which includes seed, preseed, and angel rounds—totaled $30.1 billion, a decrease of approximately 31% from $43.9 billion in the previous year. With the increasing difficulty of raising a Series A investment, seed capital became the most resilient stage in terms of new companies funded.

Series A and B rounds comprise early-stage finance, which showed a decrease of more than 40% in capital year over year to $103 billion. In 2023, it saw the most reduction in contrast to the previous funding stages.

Series C, D, E, and later-lettered venture rounds comprise late-stage funding, which decreased by 37% to 131.6 billion in the previous year. At this point, funding amounts fluctuated, with significant sums flowing to businesses in the artificial intelligence, semiconductor, battery, and clean energy industries.

A slump also affected the technological growth stage, which comprises private equity rounds for businesses that had already raised venture capital; investments in this stage dropped from $29.4 billion in 2022 to $20.7 billion.

Consistent with worldwide trends, the United States, which holds the position of the largest startup investment market with about half of all venture capital, also witnessed a significant decline in investments. Funding for startups in the United States fell by 37% to $138 billion in 2023.

Web3 is falling, while AI investments are growing

Certain industries, like artificial intelligence (AI), defied the general downturn. According to a Crunchbase analysis, global funding for AI startups increased by 9% annually to about $50 billion in 2023. Leading foundation model businesses including OpenAI, Anthropic, and Inflection AI, who raised a combined $18 billion last year, received the majority of the financing.

Funding was also raised for other areas, including battery technology, semiconductors, and insurtech.

However, Web3 saw a 73% drop in funding in 2023, from $28 billion to $7.6 billion, following a spike in activity during 2021 and into 2022. The top three industries that had a decline of more than 50% in the past year were media and entertainment (64%), e-commerce and shopping (60%) and financial services (approximately 50%).

Forecast for 2024: more business closures

Due to the fact that the venture capital markets are still processing the 2021 fundraising boom, businesses in 2023 faced a difficult funding environment. Crunchbase saw that investors were growing more cautious and establishing stricter standards for every funding level.

As a result, businesses were cutting costs and concentrating more on unit economics, which led to a notable increase in layoffs in the tech industry in 2023.

Based on the tightening of the investment market and the recent increase in the number of companies obtaining funding, Crunchbase predicted that the layoffs that occurred in the previous year will result in more company closures in 2024.

In a market for founders, it also predicts that 2024 will be another difficult year for entrepreneurs.