Global venture capital funding experienced a significant decrease in the first half of 2023, according to data from research firm PitchBook.
The decline of 48 percent to $173.9 billion, coupled with a 19 percent decrease in deal numbers, reflects a lack of investor enthusiasm and lower demand due to a notable rise in interest rates.
Interestingly, despite the overall decline, artificial intelligence (AI) startups garnered substantial interest, largely driven by the success of OpenAI’s ChatGPT. The data reveals that investors injected over $40 billion into AI startups in the past six months, including a $10 billion investment by Microsoft in OpenAI and $1.3 billion in funding for competitor Inflection AI.
Geographically, Latin America experienced the most significant drop, with an 86 percent decline, while the United States and Europe faced declines of 65 percent and 69 percent, respectively.
Investors attribute the decrease to higher interest rates, prompting a reassessment of valuations. Furthermore, the current dearth of initial public offerings (IPOs) and limited exit opportunities have made investors more discerning in their investment choices.
Kevin Colleran, a co-founder at early-stage firm Slow Ventures, stated that he refrained from making investments over the past 18 months, focusing instead on assisting his 30 portfolio companies in navigating the challenging environment. Colleran emphasized the futility of adding to the current difficulties.
PitchBook highlighted that prominent investors were less active in venture funding, and the outsized deals that previously propelled deal values to record highs were no longer prevalent. In 2021, global venture capital funding reached a peak of $745.1 billion.
Funding activity across all stages experienced a decline, with the first seed round suffering the most significant drop of 44 percent in the number of deals in the United States.
Investors noted that many firms that secured funds in 2021 still possess substantial capital and see little incentive to reenter a market characterized by lower valuations. However, they anticipate a moderate increase in demand in the second half of the year.
Mary D’Onofrio, a partner at Bessemer Venture Partners, predicted that more companies would face cash shortages and need to seek additional financing to support their plans, potentially leading to increased market activity.
