The year 2023 brought immense challenges for startup funding and survival. As economic headwinds intensified, deal activity declined sharply across stages. Capital availability tightened, valuations dropped, and runway extensions became critical. Though startups showed resilience, 2023 tested founders like never before.
Carta, a cap table management platform, just released a report on startup funding in 2023 entitled State of Private Markets: Q4 and 2023 in Review.
I spoke with Peter Walker, who leads data insights at Carta, about the most important startup fundraising stories of 2023. You can see our full conversation here.
Here are the top five startup funding trends in 2023:
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1. The Most Fatal Year for Startups
2023 saw an unprecedented number of startup failures, stemming from an inhospitable funding climate. According to data from Carta, total startup shutdowns reached 770 in 2023, up from 467 the prior year. This represents the highest number of shutdowns tracked by Carta since they began recording this data. However, the actual figure is likely even higher, as many closures go unreported to Carta.
The harsh fundraising environment starved early-stage startups of critical seed capital needed to get off the ground. At the same time, ventures overfunded in 2022 failed to pivot to more efficient, cost-conscious business models when markets shifted. This perfect storm of tough access to capital plus inflexible cost structures drove the record failure rate in 2023, making it the most challenging year on record for new startup survival.
2. The Year of the Down Round
2023 will be remembered as the year of the down round. As economic conditions deteriorated, companies across all stages faced valuation resets.
A down round occurs when a startup raises at a lower valuation than the prior round. Though damaging to morale, down rounds can provide a lifeline to promising companies caught in a shifting market. However, they signal challenges ahead.
In 2023, over 19% of venture deals were down rounds every quarter - the highest rates since 2018. The trend remained steady throughout the year, with 19.6% of Q4 deals being down rounds.
For startups, lower valuations reflect dimmer growth prospects. With inflation reducing discretionary spending and cheap capital drying up, growth projections softened across the board. This forced sober valuations based on potential.
Founders dislike down rounds, but the alternative may be bankruptcy. By accepting a lower valuation and securing capital, startups survive to fight another day. However, management faces dilution of ownership and must rebuild confidence, as employees see paper wealth vanish.
2023 proved valuations can't defy economic gravity forever. Eventually they revert closer to intrinsic value. Despite the blow to morale, down rounds enabled many startups to survive the downturn. With perseverance, they may still thrive when conditions improve.
3. A Bridge-building Boom
Bridge rounds became increasingly appealing for companies struggling to raise new primary capital at their desired valuation, or at all. This extended runway and bought time to navigate the difficult fundraising landscape.
This trend was pronounced across all stages but especially in Series A. In Q4, 45% of Series A fundings were bridge rounds - the highest rate this decade.
Facing a prolonged fundraising drought, startups turned to bridge rounds to stay afloat in 2023. These stopgap capital infusions provided extra runway when primary fundraising stalled.
A bridge round offers existing investors the chance to double down on a struggling startup by extending its lifeline. Though the same series as the previous round, bridge rounds typically come from insiders on the same terms. Unlike primary rounds that bring in new capital, bridge rounds are from existing backers. They allow startups time to improve before courting new investors.
For startups denied their desired valuation or unable to close a mainstream round, bridge rounds were a lifeline. To survive the elongated fundraising cycle, startups used them to cut costs and extend runway.
4. Startup Funding Resets to Pre-pandemic Levels
Total deal count recorded on Carta fell 24% year-over-year, and capital raised declined 50%.
Though a difficult year for startup funding, 2023 could have been worse. Despite dire forecasts of the worst funding environment in a decade, 2023 merely returned to pre-pandemic levels.
In the hot investment climate of 2021-2022, swollen deal flow and funding characterized startup fundraising. As the economy cooled in late 2022 and 2023, activity moderated to match 2018-2019 levels. For instance, Carta logged 5,799 deals in 2018 versus 5,409 in 2023.
This correction brought sanity after a period of exuberance. With less competition, strong startups can stand out to investors. The new landscape rewards operational excellence over growth at any cost.
While challenging, this environment fosters stability. Startups must now build sturdy foundations rather than prematurely pursuing scale. As funding normalizes, founders can focus on customers and products, not chasing excessive capital they can't deploy efficiently. This reset will leave startups healthier long-term.
5. Time Between Rounds Hits New Highs
The median time between funding rounds hit historic highs in 2023, forcing startups to stretch runways further. In Q4, the median period between Series A and B reached 784 days - over two years. This caps a multi-year trend of lengthening fundraising timelines across stages.
Slow fundraising partly results from excessive earlier exuberance. Eager investors overfunded startups in 2020-2021, frontloading capital they can't efficiently deploy now. The measured pace today allows full use of existing cash before raising more.
However, the timeline presents challenges. Founders must slash budgets to survive long fundraising deserts, stalling hiring and growth plans. And valuations often reset between elongated rounds.
To thrive despite delayed fundraising, founders must ruthlessly focus on capital efficiency. With patience and discipline, startups can weather the long waits between rounds and stand ready to capitalize when conditions improve.
In 2023, the startup funding climate turned decidedly hostile, as growth evaporated and investors became more selective. Valuations returned to sane levels after a period of exuberance. Bridge rounds and cost-cutting became essential for survival. It was a time of grit and determination for founders, but also honed their ability to build viable companies under pressure. Though 2023 tested their mettle, the most tenacious startups will see sunnier days ahead.
