As the global venture funding landscape witnessed a marked decline in 2022, reaching $445 billion, a staggering 35% decrease YoY from the previous year, investors still managed to spend $100 billion more than in 2020. The unicorn boom also saw a slowdown, with only 22 new companies joining the elite ranks in the final quarter of 2022. The venture capital arena is predicted to adopt a more measured approach in the coming year, characterized by cautious funding valuations and a more disciplined expenditure strategy. In 2023, the increasing prevalence of generative AI will prompt experimentation and business model innovation, with a greater emphasis on utilizing machine learning and AI for a competitive advantage. ChatGPT, the epitome of cutting-edge technology, is poised to revolutionize businesses' operations with its ability to harness the power of natural language processing. 2023 presents a unique opportunity for increased M&A activity involving VC-backed startups in the US, as private equity and strategic wield substantial capital. Despite the potential impact of interest rate hikes on dealmaking, the market may shift towards equity components as access to cash becomes increasingly scarce. From venture capital to artificial intelligence, here is Part-I of Startup Trends in 2023.
2023: A Reckoning in the Venture Capital Landscape
According to Crunchbase data, global venture funding reached $445 billion in 2022, marking a 35% decline YoY from the $681 billion invested in 2021. Despite the slower funding environment in 2022, investors spent $100 billion more than the $342 billion invested in 2020. Seed funding was the least impacted funding stage, with Q4 seed funding totaling $7 billion, down 35% YoY. Early-stage funding totaled $31 billion in Q4, down by 54% YoY. Late-stage and technology growth funding was $40 billion, down 64% YoY from $110 billion in Q4 2021. The unicorn pace also slowed in Q4, with just 22 new companies joining The Crunchbase Unicorn Board. The venture industry faced a reckoning in 2022 due to the stock market crash, tech layoffs, and crypto's collapse. Capital became more expensive, and demonstrating unit economics became a priority for investors.
In 2023, the venture capital market is expected to be more cautious and less favorable for startups due to the decline in funding valuations and a more disciplined approach to spending by founders. Global dry powder for private equity and venture capital is estimated to be around $1.3 trillion and $580 billion, respectively. Limited partners (investors in venture funds) are expected to slow down commitments in the coming years. In the third quarter of 2022, global venture funding dropped by over 50% YoY, and late-stage funding declined even more dramatically. Valuations in the frothy market of 2021, particularly for late-stage startups, are starting to look unsustainable. Companies that need to raise funding face a dilemma if they cannot grow into initial valuations and may have to reset their valuations. The fundraising climate for venture managers is expected to be more challenging in 2023. Still, VC financings are anticipated to pick up in the second half of 2023 as companies run out of cash or take advantage of friendlier market conditions.
Unleashing the Power of Generative AI: Revolutionizing Business Operations
AI is still in its early stages, and companies are still figuring out how to use it effectively. There is a need for more skilled engineers and data scientists, and it can take time to get buy-in from executives. In 2023, generative AI will become more widespread, leading to experimentation and reimagination of business models. Business leaders who use machine learning and generative AI on their proprietary data sets will have an advantage over competitors. 2023 will start an honest AI reckoning for companies across various industries.
As an advanced language model, ChatGPT represents a cutting-edge technological development poised to revolutionize businesses' operations. Its ability to analyze, understand, and generate human-like text enables organizations to harness the power of natural language processing and make data-driven decisions at unprecedented speed and scale. As a result, ChatGPT has the potential to transform the future of business by ushering in a new era of efficiency, productivity, and customer engagement.
2023 Forecast: M&A Surge Ahead for VC-Backed Startups
According to Dan Nash, head of investment banking at Cohen & Co. Capital Markets, there is a possibility of a significant increase in M&A activity involving VC-backed startups in the US in 2023. Despite a drop in dealmaking towards the end of 2022, private equity and strategics have significant capital and are likely to make deals as valuations come down and startups need cash. Some experts expect deal volume to pick up in 2023, but deal dollars may not. Nash believes the IPO backlog has affected industries such as health care, fintech, and consumer tech the most, and these areas could be good spots for cherry-picking as funding dries up. Ghaffary said while interest rate hikes could curtail some dealmaking, the market may see an increase in equity components as cash becomes more expensive.
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