VC funding dips in Q1, 2023- Here are the most affected regions
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Funding is the lifeblood of startups, the availability of capital and willingness of investors to release funds determines what the startup ecosystem will look like. The first quarter of 2023 has been anything but exciting.
The Startup ecosystem which was on full throttle in 2021 seems to have reached its peak and taken a head dive in 2022, and the trend continued to the first quarter of 2023.
As for why investors are so cautious and reluctant to deploy funds, there are a number of reasons to pick from; soaring interest rates, the Ukraine war, stalling IPOs, ditching tech stocks, lower valuations, and the collapse of the Silicon Valley Bank that sent shock waves throughout the industry.
How deep is the dip?
Occasionally, you would see some regions or sectors fair better than others despite the unavailability of funding. This time, no region or sector was able to dodge the bullet. The $16 billion Open AI and Stripe funding gave the tech sector a significant boost.
But even that was not enough to make up for the huge difference when compared to the amount raised in the first quarter of 2022 which saw over $162 billion in startup funding. In comparison, only $76 billion was raised in the first quarter of this year, a difference of about 52%.
As if that was not enough, Silicon Valley Bank renowned as the startup bank collapsed, leaving over 20,000 startups scrambling for funds to stay afloat. The effect of SVB collapse was far-reaching since the bank not only catered to US startups alone but also startups in Africa, Europe, and Asia.
The hardest hit regions
According to Crunchbase, Latin America took the hardest hit during the downturn. This is quite ironic for a region named the fastest-growing startup investment region in the world in 2021, after startups scooped up a total of about $19 billion from investors.
At the time, Crunchbase also reported that investors in the region were feeling optimistic regarding the booming startup ecosystem.
Factors like increasing foreign direct investment, a growing pool of experienced startup entrepreneurs, and a huge marketing opportunity for the growing middle class in Latin America were considered the major drivers of the boom.
Fast-forward to 2023, Latin America saw investments in startups shrink by a whopping 84% with major investors only participating in a few funding rounds.
The second significant investor pull-back this year happened in Europe. The region’s year-over-year investment shrank by 66%. Startups in Europe raised about $10.6 billion in Q1 of 2023, the lowest since Q1 2020 when the pandemic caused investment to nose-dive.
Seed stage and late stage startups suffered the most while early stage startups barely made it with a 7% decrease in investment.
Startups in Asia fared much better than those in Europe and Latin America, but the region had its fair share of struggle. Venture funding in the region dropped by 57% from the first quarter of last year to $15.2 billion, the lowest in the past three years.
Again, seed stage and late stage startups seem to bear the brunt of the downtrend as only $1.4 billion was raised in 723 seed funding rounds.
Future trend speculation
So far, all startup stages have been affected by the downtrend in venture funding. But the seed stage and early stage startups are most affected, and this indicates a change in investor behavior.
Rather than shore up cash for long-term investments that require commitment, investors are more interested in sustaining their present investments. This explains the support for late stage startups like Open AI and Stripe.
At least, that’s what experts speculate and it’s expected that investors will continue to exhibit this level of cautiousness all through the second quarter of the year. What exactly caused investment to dip for startups in the seed and early stages remains a matter of debate.
According to Crunchbase, investors are sitting on a dry powder of about “$1.3 trillion globally for private equity and $580 billion globally for VC”. So no, it’s not a matter of if the money is available. The most obvious reasons, therefore, are the stalling IPOs and low startup valuations.
That being said, no one is sure of when the market will correct itself. It could happen later this year or we may have to wait until next year before we see an uptrend in venture investment.
(PS: Unless otherwise stated, all statistics in this article are derived from Crunchbase.com)
FAQs: VC funding dips in Q1, 2023- Here are the most affected regions
Venture capital funding dipped in Q1 2023 due to a mix of global economic challenges. Key reasons include soaring interest rates, the ongoing Ukraine war, stalling IPOs, low startup valuations, and the collapse of Silicon Valley Bank. These factors have made investors more cautious, choosing to focus on sustaining their existing portfolio rather than exploring new opportunities.
Global startup funding in Q1 2023 amounted to $76 billion, a 52% decrease compared to the $162 billion raised in Q1 2022. This sharp decline highlights the extent of the financial strain on the startup ecosystem.
Latin America was the hardest-hit region, experiencing an 84% decline in startup funding compared to the previous year. This is a significant contrast to its booming ecosystem in 2021, when it saw record funding levels.
The steep decline in Latin America's funding can be attributed to factors such as decreased investor confidence, economic uncertainties, and a broader global investment slowdown. Many major investors reduced their participation in funding rounds, impacting the region's startup ecosystem heavily.
European startup funding saw a 66% year-over-year decline, raising just $10.6 billion in Q1 2023. This represented the lowest funding level since Q1 2020, with seed-stage and late-stage startups suffering the most.
Asia fared slightly better compared to Europe and Latin America, but still experienced a 57% drop in funding to $15.2 billion in Q1 2023. Seed-stage startups in Asia were particularly affected, raising only $1.4 billion across 723 rounds.
The collapse of Silicon Valley Bank caused widespread disruption, particularly for over 20,000 startups that relied on the bank for funding. The repercussions were felt globally, straining startup ecosystems in the United States, Africa, Europe, and Asia.
The tech sector received some notable funding despite the downturn. Major funding rounds, such as the $16 billion investment in OpenAI and Stripe, provided a much-needed boost to the industry, though it wasn't enough to offset the overall decline.
Seed and early-stage startups are struggling more because investors are adopting a cautious approach, prioritizing late-stage companies that offer a more predictable return on investment. Stalling IPOs and low startup valuations have also discouraged risk-taking in younger startups.
It is uncertain when global venture capital funding will rebound. Experts speculate that market corrections may occur later in 2023 or in 2024. However, this depends on improved macroeconomic conditions, stabilizing valuations, and a resurgence in IPO activity.
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