For VC investors and startups alike, this year’s first quarter was a painful hangover from 2022, the stunning year that ended the glitzy venture funding party that was 2021.
For Q1 2023, the operative word is down: funding is down, deal flow is down, overseas investment is down. The only soaring numbers in the first quarter are those displayed in our Crunchbase Tech Layoffs Tracker.
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As for how we all got here, there are plenty of factors to choose from — rising interest rates, tumbling tech stocks, a war in Ukraine, weakening valuations, a stalled IPO pipeline, and let’s not forget Silicon Valley Bank. Now the question is: Has VC funding hit bottom, or do round sizes and deal counts have further to fall? We dive deeper into this year’s first-quarter numbers to find out.
The pain continues
The downward march of VC funding numbers that began in Q1 2022 and accelerated in the third quarter continues to drag on into the current year. Global VC funding fell 53% year over year in Q1 2023 to $76 billion — and that’s counting two mighty lifts by OpenAI and Stripe, which each raised billions in recent months. Even early-stage numbers dropped as investors continue to hoard their record levels of dry powder.
Nowhere to hide
Sometimes in a down market, certain regions will enjoy a surge due to local factors or investment in a particularly strong sector.
But there was nowhere to hide in first-quarter 2023. The only region to show a real uptick in venture funding was North America, and that was likely due to the OpenAI and Stripe multibillion-dollar deals. North American funding in the first quarter reached $46.3 billion — a decline of 46% from the same period last year. And without those two large deals, Q1 venture funding would have been down even more dramatically, with a more than 60% decline from the same period last year.
Latin America hardest hit
Latin America was impacted by the downturn more than any other region in first-quarter 2023, year over year. Venture investment in Q1 was down 84% from the year-ago quarter, per Crunchbase data. That puts Central and South America, which just over a year ago ranked as the fastest-growing startup investment region in the world, on the short list for the fastest shrinking.
Active investors in the region have cut back sharply this year, such as SoftBank Latin America Ventures, which participated in 34 rounds in 2021 and 2022. The firm joined just two rounds this year. Jumbo-sized rounds of $100 million and up are also apparently a thing of the past, with a single venture round of $100 million or more closed in Q1. Late stage, early stage, seed — they all struggled to raise funding.
Europe’s U.S. investors pull back
European startups raised $10.6 billion in funding in Q1, down 18% quarter over quarter and a whopping 66% year over year, as American investors pulled back.
Seed funding saw a dramatic 25% collapse last quarter — a signal that VCs aren’t big on making long-term commitments right now. While late-stage startups experienced the worst funding pullback year over year, early-stage funding performed the best of the three stages (though funding was still down 7%).
The pullback by U.S. venture firms landed a telling blow on the region. Not only are deal counts the lowest they’ve been in a three-year period, Europe’s first-quarter funding is the lowest the continent has seen since Q1 2020, when the region garnered $9.9 billion.
Asia funding falls in biggest markets
Venture funding in Asia also got off to a brutal start in 2023, declining 33% from the previous quarter and a massive 57% from the first quarter of last year. Total venture funding in the region fell to $15.2 billion — the lowest in at least the past three years.
As in other regions, late-stage and growth rounds suffered the most, both in terms of dollars and percentage. Late-stage and growth rounds only saw $7 billion in investment — a 64% drop from Q1 2022, which saw $19.7 billion. Seed and angel funding rounds also weakened, with the first quarter this year seeing only $1.4 billion raised in 723 rounds.
Downturn shakes up investor ranks
In such a reeling and volatile market, it’s no wonder that the ranks of the most active global venture investors were shaken up in Q1 2023.
Andreessen Horowitz and General Catalyst rose to the top of our list as past VC leaders such as Tiger Global Management and SoftBank Vision Fund didn’t even crack the top 20. The quarter saw muted activity at seed and early stage, and fewer big late-stage rounds amid a lackluster IPO market.
Looking to the immediate future, it’s hard to see what will start the music playing again. Overall, venture and seed firms are putting less capital to work in fewer deals, and most of the negative factors that prompted investors to pull back are likely to linger like a bad headache into second-quarter 2023.
Illustration: Dom Guzman
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