2023 Was Very Tough For Startups And Investors, Why And Where Do We Go From Here?

Different parts of the world have fared very differently but sitting in Silicon Valley, overall 2023 has been a difficult year for both startups and investors. Three data points:

• Longer wait time between rounds, partly because VC funding this year has been its lowest since 2018. Funding in the third quarter is the lowest quarterly total raised in over five years in the US and Canada. More in the Business Insider article from Nov 10, 2023: “The great startup cash crunch is underway — and it's forcing late-stage companies to face their demise.”

• Just about 1 in 5 companies have had down-rounds i.e. raised money at a lower valuation than in the past. In 2021 that figure was 1 in 20 companies. More in the Fortune article from Nov 30, 2023: “Startups weather a dismal year during which 543 have already declared bankruptcy or shut down: ‘You can’t sugar coat it’.”

• $12B from 588 separate corporate exits in the first half of 2023. The full-year figure is now on track to come in as the lowest of the decade. More in the CNN article from Dec 7, 2023: “2023 was an ‘extinction’ level year for tech startups. Where did all the money go?”

How did we get here? The biggest culprit is arguably high interest rates. During the core pandemic years of 2020-21 the Fed set interest rates to the lowest levels in modern history but in 2022 they rose within a matter of months to the highest levels in 30 years, illustrated by the graphs below from Mortgage Reports.

The second biggest culprit is likely lack of exits. One metric is IPOs – the stock market in the US continues being slow compared to the years right before. As of writing this article there have been 149 IPOs in 2023, which is lower than the 175 by this time in 2022. And overall 2023 and 2022 have been duds compared to 2021 (1035 IPOs, all-time record) and 2020 (480 IPOs, also a record at the time). M&As follow a similar suit to IPOs. Overall it means there is less liquidity, which means VCs and LPs are more conservative in investing.

How do we get out of this rut?

Barring a black swan event, we should expect such high interest rates of ~7% to come down – perhaps not close to 0% like in 2020 but perhaps to ~4%. That liquidity would then encourage limited partners (LPs, the people who invest in VC funds) to give more to GPs (the actual VCs running a fund) which would then mean more money for startups. Same for exits – with more capital flowing there will be a larger appetite for buying companies or for them to go public.?

When does this all happen?

Nobody knows. But if history is any indication, monetary policy is a critical tool in an election year. An incumbent wants to show a strong economy, while the challenger has an incentive to show quick results. So at Tau Ventures we expect a correction in startup land by Nov 2024, with the effects really coming into force in 2025.

Ultimately a slowdown doesn’t matter in the long run – the inexorable force of progress is going to ensure amazing companies blossom. But the current pain startups and investors are feeling will likely endure for a bit more. Here is to the brave new world.

Originally published on “Times of India” and “Data Driven Investor," I am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr -- good length; did read). Many of my writings are at https://www.dhirubhai.net/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.