U.S. investors injected $170.6 billion into startups in 2023, marking a notable decrease of almost 30 percent from the previous year’s figure of $242.2 billion, according to PitchBook data.
This decline reflects the ongoing challenges faced by the venture capital funding market, grappling with valuation resets amidst the backdrop of rising interest rates.
The data reveals a consistent downward trend in U.S. venture funding since the peak in 2021 when startups raised an impressive $348 billion. In 2023, despite the allure of megadeals in artificial intelligence (AI), the funding landscape experienced a cautious atmosphere, with investors proceeding more judiciously, Reuters news report said.
AI startups emerged as significant beneficiaries, attracting one-third of the total investment in the U.S. last year. The surge in investor interest followed the prominence of OpenAI’s ChatGPT and a race among startups to advance AI technology. AI labs focusing on training large language models, an inherently resource-intensive endeavor, contributed notably to the year’s investment landscape.
PitchBook data highlighted outsized investments in AI leaders such as OpenAI and Anthropic, accounting for 10 percent of the total deal value in 2023. Despite the overall dip in funding, the AI sector stood out as a key driver of investment.
The fourth quarter of 2023 witnessed a modest uptick in deal activity, with 3,934 deals completed, fostering hopes of potential market stabilization. However, a significant shift was observed in valuation dynamics, as instances of startups raising funding at lower valuations than in their previous rounds surged from 8 percent in 2022 to 20 percent in 2023. This suggests a broad reset of valuations, particularly among late-stage companies.
Among the 723 unicorn companies valued at over $1 billion in their latest funding rounds, many are expected to seek additional capital in 2024 as they deplete existing cash reserves. However, uncertainties loom over the availability of capital, as venture capital firms, while holding over $270 billion in unallocated capital as of mid-2023, have experienced a slowdown in their own fundraising pace.
PitchBook data reveals that U.S. venture capital firms raised $67 billion in 2023, marking a substantial 60 percent year-over-year drop and hitting a six-year low. This situation could potentially exacerbate the capital needs of startups facing financial constraints.
