This article is Part One of our Mid-Year Report, which reviews the first half of 2023 and looks ahead to the rest of the year. In our next installments, we’ll share our IPO predictions and reader survey results, and we’ll also dive deep into trends and data in AI venture funding and their impact.
After a bumpy 2022, there was little reason to believe 2023 would be any smoother in the realm of tech, startups and venture capital.
Through the first six months, the new year has done anything but disappoint on that front.
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From crypto contagion to mass layoffs to a banking crisis to — yes — the neverending AI craze, the first half of the year has been a winding ride for venture and startups.
Let’s take a look back.
Crypto in crisis and slowdown
The year started with many folks still trying to wrap their heads around one of the greatest startup implosions of all time: That of crypto exchange FTX. Company founder Sam Bankman-Fried was already facing criminal charges — including fraud — in the collapse of the highly valued company.
FTX and FTX US, its U.S.-based exchange, were valued at $32 billion and $8 billion, respectively, and backed by some of of the biggest names in venture — including Sequoia Capital, NEA, Lightspeed Venture Partners, Insight Partners, Temasek, SoftBank Vision Fund, Thoma Bravo, SoftBank Vision Fund 2 and Coinbase Ventures.
Despite the crypto contagion that gripped the industry — with several startups declaring bankruptcy and/or announcing layoffs — the year started with crypto prices actually rising significantly: Ether and Bitcoin were both up more than 50%.
The unexpected price spike seemed to buoy the industry somewhat, and many people saw it as a sign of resilience in crypto, blockchain and all things Web3.
But VC optimism was not running as high. Crypto and nearly any other heavily venture-backed sector continued to show signs that the slowdown of 2022 was lasting into the new year.
Crunchbase numbers at the start of the year showed overall global venture funding in 2022 declined 35% from 2021 to about $445 billion. While still a significant amount of money, it paled next to the $681 billion invested in 2021 — an all-time high — and numbers have not shown any signs of rebounding to those levels.
AI saves the day?
But if there is anything that will help those numbers, it became clear early in the year it would be artificial intelligence.
The seeds of this year’s AI craze were firmly planted in late 2022, when London-based AI-driven visual art startup Stability AI, San Francisco-based AI video and audio editing tool Descript, and Austin, Texas-based AI content platform Jasper all raised big rounds.
However, the even bigger news came just a few days into the new year, when it was reported that OpenAI, the company behind the artificial intelligence tools ChatGPT and DALL-E, could be valued at $29 billion in a new tender offer.
By the end of January, Microsoft confirmed it had agreed to a “multiyear, multibillion-dollar investment” into OpenAI. While the exact dollar amount was not confirmed, Semafor reported earlier that month that Microsoft was in talks to invest as much as $10 billion.
There was no looking back after that for AI, as dozens of startups in the sector — or at the very least claiming to be using AI — raised billions of dollars. Some of the biggest deals included:
- A $450 million Series C for Anthropic — a ChatGPT rival with its AI assistant Claude — which reportedly valued the company at $5 billion in May.
- A $270 million Series C for Toronto-based Cohere in June that valued the company at $2.2 billion. The startup builds large language models that allow AI to learn from new data, and can be customized and put into applications for features like interactive chat.
- In March, San Francisco-based Adept AI raised $350 million in a Series B at a reported post-money valuation of at least $1 billion.
Those rounds were just a sampling of investors’ insatiable appetite for all things AI, as countless other startups raised cash in the sector even as funding continued to dip in almost every other sector.
The AI craze among investors included large corporations and their VC arms. Aside from Microsoft, others including Google, Zoom Ventures, Nvidia, Oracle and Salesforce Ventures 1 all found it hard to say no to big rounds in the AI space.
While it seems a near certainty that the second half of 2023 will be filled with more large fundings at sky-high valuations, talk about the disruptive technology already has turned to regulation due to the possible impact AI could have on everything from jobs and the economy to data and privacy, and even mental health.
Yet another crisis
Not even AI could stop what would come next, as the industry would suffer a most unexpected blow.
On March 9, Silicon Valley Bank — which had relationships with more than half of all venture-backed companies in the U.S. and countless VC firms — saw its stock price plunge after announcing it would sell $2.25 billion worth of stock to shore up its balance sheet.
Even as the bank sought to assure customers all was well, the announcement rocked the venture world and led to concerns about the bank’s liquidity and balance sheet strength.
Customers — including many startups — sought to get their deposits out of the failing bank, with many needing the money just to make upcoming payrolls. The bank’s collapse forced Parker Conrad’s workforce management startup Rippling to raise $500 million in hours so its clients could pay employees as concerns about access to SVB-held funds swirled.
That soon led to a run on withdrawals and an end of what had become the dominant bank for VC-backed startups for the past 40 years, providing banking services for such “up-and-coming” tech companies such as Cisco Systems and Bay Networks back in the day.
SVB’s collapse was in part due to the decline venture had witnessed through the past year-plus. During the 2021 venture capital boom, the bank was flush with cash as private companies raised huge sums of fresh capital at sky-high valuations. But the market slowed with rising interest rates and that cash dried up as deposits by startups dipped. SVB simultaneously made the disastrous decision to invest in long-term, higher-yield bonds, which further hindered its liquidity.
On March 26, the Federal Deposit Insurance Corp. announced First Citizens BancShares had agreed to buy the loans and deposits of the failed Silicon Valley Bank.
Just like that, a vital pillar in the venture capital ecosystem — known for its vast venture lending practice for startups — was gone after four decades.
A report by the Federal Reserve Board said the collapse was a “textbook case of mismanagement by the bank” and that when the bank’s board and management realized its risk, it did not take the appropriate steps to fix those problems quickly.
Days after regulators issued a report on the historic collapse of Silicon Valley Bank, First Republic Bank — with its expanding technology division and serving as the bank of a growing number of startups — also fell into receivership and was quickly sold to JPMorgan Chase.
The two banks’ collapses — the second- (First Republic) and third- (SVB) largest in U.S. history — have changed and likely will continue to change the way startups bank, with many now looking to diversify where they put assets and how they are held.
The failures also will continue to affect how companies can secure venture debt — something more needed now in a slow venture market.
Layoffs and money
As cash has become tighter in tech, one recurring theme from last year through the entire first half of this year has been layoffs.
Since the start of the year, around 150,000 workers at U.S.-based tech companies — or tech companies with a large U.S. workforce — have been laid off in mass job cuts, according to Crunchbase News’ Tech Layoffs Tracker.
Those layoffs have happened everywhere from big-name public companies including Alphabet, Oracle and Coinbase, to startups like Pendo and Reddit.
Those job cuts probably shouldn’t come as a surprise and likely will continue as the year presses on. VC and growth equity giants including Andreessen Horowitz, Tiger Global, Khosla Ventures, Insight Partners and many others have substantially slowed their investment pace since the highs of 2021.
That has shown little sign of abating as we move into the second half — although SoftBank founder Masayoshi Son told investors just recently that the Vision Fund unit would shift back to “offense mode” and is looking at being the leader in the AI revolution.
Perhaps AI alone can boost VC numbers and get investors back to putting big cash in startups. But more likely the focus the public market has seen shift back to profitability and cash flow will continue to make VCs look less at rapid growth and the big money valuations that come with those numbers.
Nevertheless, the venture and startups sectors have shown amazing resilience amid layoffs, less money and multiple crises.
It’s likely VC and private tech companies will have to continue to show that resilience in the second half of 2023.
Illustration: Dom Guzman
Salesforce Ventures is an investor in Crunchbase. They have no say in our editorial process. For more, head here.↩
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