Global venture capital funding drops in first quarter amid economic challenges

Venture capital funding for start-ups globally continued to decline in the first quarter of the year amid a challenging economic environment, a study from CB Insights has found.

Investments in the three months to the end of March plunged more than 60 per cent annually to $58.6 billion, from $151 billion in the same period last year, to hit their lowest level since the fourth quarter of 2019, the New York-based market intelligence platform said. But the first-quarter performance — a fifth straight quarter of declines — is still at a slower pace against recent quarters.

Compared with the third and fourth quarters of 2022, the drop in the first three months of 2023 is 28.2 per cent and 12.7 per cent, respectively.

Funding peaked at $181 billion during the fourth quarter of 2021. Meanwhile, the number of deals fell nearly 37 per cent annually to 7,024 in the first three months of 2023, from its peak of 11,081 a year ago, the study said.

However, the $6.5 billion funding round by payments processor Stripe accounted for 11 per cent of the first quarter's total, and excluding this would have resulted in a 22 per cent decline in the global funding levels.

This suggests the "underlying pace of the venture slowdown is not abating", CB Insights said. Stripe, which has headquarters in San Francisco and Dublin, raised the amount last month to "provide liquidity to current and former employees and address employee withholding tax obligations related to equity awards".

Start-ups, which provide key solutions for consumers in an increasingly digital world, continuously seek investment to fund their operations and advance their products.

Initial public offerings (IPOs) also posted a decline in the first quarter of 2023, falling nearly 52 per cent to 86, from 171 a year ago, the study found.

This is down more than 70 per cent from a peak of 299 in the fourth quarter of 2021. The slowdown is attributed to a combination of factors, including high inflation, rising interest rates, weak stock market performances and the current banking crisis.

"More start-ups are delaying their public debuts. The numbers reflect their hesitation," it said.

Asia led the IPO growth in the first quarter with 56 listings, which is down 58 per cent on a quarterly basis but still accounted for 65 per cent of the global total. The top 10 global IPOs by valuation were all for China-based companies, CB Insights said.

IPOs in the US rose by a third to 16, while Europe was flat with 11, both on a quarterly basis. Funding in almost every region recorded double-digit quarter-on-quarter declines in the first three months of 2023, with Latin America posting the biggest fall of 54 per cent, having raised only $600 million, the study said.

Asia's funding dropped 27 per cent to $12.5 billion, while Europe declined 12 per cent to $10.4 billion. By contrast, US funding was more stable, falling by 1 per cent to $32.5 billion.

However, without Stripe's recent funding round, the US would have reported a funding decline of 21 per cent, "signalling that no region is immune to the ongoing venture slowdown", the study said.

Mergers and acquisitions, meanwhile, showed signs of stabilising, as they marginally rose to 2,146 quarter-on-quarter. Europe was the most active in M&A activity during the first quarter with 40 per cent of deals, while the US accounted for 38 per cent.

The median deal size for late-stage rounds also dropped considerably in the first quarter of 2023, falling 45 per cent in the year to date to $15 million, from $27.3 million a year ago, the report said.

Early-stage rounds were much more stable, as the median deal size declined by 8 per cent to $2.2 million. "As investor concerns mount over bloated valuations and tepid public markets, late-stage companies are facing challenges raising new rounds," CB Insights said.

Late-stage rounds also figured for a smaller share of deals overall with just 8 per cent — its lowest level in a decade, it said.

In contrast, early-stage rounds accounted for two out of every three deals during the first quarter, "reflecting the current investor preference for early-stage opportunities". The birth of unicorns — start-ups with a valuation of $1 billion and above — was also at its lowest level since 2017, with only 13 emerging in the first quarter of 2023, a nearly 90 per cent fall from the 127 recorded in the period a year ago, and similarly, down from a peak of 148 in the second quarter of 2021, the study showed.

Artificial intelligence companies "appear to have a better chance than most" to achieve this status, as four of the 13 unicorns that emerged during the quarter were AI developers, CB Insights said.