After a remarkably successful 2021 and a somewhat mixed 2022, the optimistic atmosphere for startups and venture capitalists appears to have dissipated in 2023. Despite the absence of the doomsday economic scenarios anticipated at the beginning of the year, the prevailing sense of unease following the collapse of Silicon Valley Bank and a less-than-promising IPO market is casting a shadow over the future.
Highly anticipated IPOs from Instacart and Klaviyo, initially seen as potential signals of a market resurgence, began strong but are now trading 15-20% below their initial prices. This has prompted other potential public companies to withdraw, eliminating a liquidity option for early investors. The fourth quarter is devoid of major listings, and a quick rebound in the first quarter of 2024 is not expected.
The outlook for mergers and acquisitions (M&A), another exit strategy for venture funds, is also bleak. The M&A landscape has been subdued for most of the year and is on track to close with the lowest annual level in a decade. PitchBook’s Q3 Venture Monitor delivered discouraging news, reporting only 216 exits in the third quarter, the lowest since Q2 2013. While IPOs resulted in the highest exit totals since Q4 2021, this was considered a one-time boost.
Year to date (as of Sept. 30), there have been only 752 exits, a significant drop from 1,375 last year and 1,979 in 2021. New funds also saw a decline in Q3, dropping 17% from the previous quarter, with 111 closed. The average fund size plummeted by 56% to $84.7 million, compared to the Q2 average of $161 million and the record average of $371 million set in Q1 2022.
The report highlights significant stress in the market, noting an increase in companies resorting to bridge, continuation, or down rounds. Inside rounds are at multiyear highs, and there are fewer instances of new lead investors obtaining board seats than in the past decade. Both investors and founders are prioritizing stability and cash flow to navigate current market challenges.
Year to date, U.S. startups have raised $126 billion through the end of the third quarter, a notable decline from the $195 billion raised at the same time last year and the $239 billion in the first nine months of 2021.
Several high-profile startups have shut down due to difficulties in securing additional financing:
- Convoy, once valued at $3.8 billion, ceased operations in October, causing nearly $1 billion in funding to vanish.
- Zume Pizza, a high-tech pizza company that raised $445 million, became insolvent in June due to technical issues and an unsuccessful business model pivot.
- Olive AI, a healthcare automation company valued at $44 billion with nearly $900 million in funding, closed its doors earlier this year.
WeWork, a real estate giant, filed for bankruptcy, costing SoftBank over $14 billion, though the company may continue following reorganization.
The report suggests that 2023 is on track to be the second-worst year in a decade for exits. Without the revival of an IPO or merger market, 2024 could be even more challenging. The fourth-quarter numbers, anticipated in mid-February, will likely provide insight into the trajectory of the market.
Source: FastCompany