Venture Capital Benchmark Q3 2023

US, EUROPE, LATAM

2023 on pace to mirror 2019 VC in global funding

The VC community has many catchy terms to define the past two years relative to 2021: a regression to the mean, a return back down to earth, VC winter, and so on. In general, there is consensus that this “reality check” was a necessary market correction. But it’s not without pain, as many founders face long investment cycles, an increasingly high bar for funding, and slower sales cycles. Bridge rounds, restructuring, many smaller M&A activity, and going into cockroach mode while founders aim to hit meaningful milestones are true signs of the times.

With YTD numbers, we try to extrapolate how this year might end. Total funding is on track to have come down from 2022, but is on par with 2019 – indeed, returning to the mean. In the Q3 2023 VC Benchmark, we dig into the nuances around Seed to Series B+ across the US, Europe and Latin American markets, with voices from the trenches – founders and investors. In terms of quarter-over-quarter results, we’re happy to see an uptick in funding going to Series B+ companies, and a warming of the IPO market.

Welcome to the Q3 VC Benchmark.

TLDR

Q3 Key Takeaways from TheVentureCity

We’ll dive more into each one of these throughout the report, but here’s a snapshot:

  • Funding: Q3 venture funding was up ~9% QoQ, at $59B in US, Latam, and Europe
  • Deals: Round sizes increased at every stage QoQ, but deal count decreased
  • Markets: IPOs are back, with a 24% increase QoQ; sets positive signal for exits
  • AI: Investors keep pouring gas on the fire, but high costs are becoming evident
  • Clean Tech: More than half the top 10 global mega rounds, representing 16% of all capital invested, were devoted to the EV industry and clean energy innovations
  • Focus on Performance: Early-stage to public companies, inventors want to see viable business models supported by data

Trends to watch

The biggest headlines

For the founders and investors that have witnessed multiple market cycles, they know that massive opportunities exist today, especially given the technical advancements available at founders’ fingertips. Many massive, generational companies were founded during recessions or massive market dislocations. Chamath Palihapitiya from Social Capital comments on the phenomena in relation to high interest rates, a common contributor to recessionary environments when equity markets recede. Ultimately, he concludes that technology startup success is most likely to occur when companies exploit massive technology innovation during periods of higher than average interest rates. The former part of this tech startup equation may come in the form of leap forwards in alternative intelligence (AI) and reduction in cost of computing power.

Founders are rushing to incorporate AI into their value propositions while VCs debate where in the AI value chain they should invest, and which portions are most likely to win. The pace of innovation in the space is frightening for many, especially with the onset of ChatGPT by OpenAI and the rapid advancements of their computing models that huge enterprises are now adopting.

VC perspective

FUNDING CONTINUES TO NORMALIZE

Elizabeth Piñon, Partner here at TheVentureCity and former hyper-growth startup operator, always has her ear to the ground. She is constantly in touch with early and mid-stage founders as well as investors from across the spectrum. Here she shares her view from the investor chair.

Q3 Global VC Funding

Not great, but not all bad

Venture Capital deal count continued on a downward trend since the beginning of this year, and continued to drop 27% QoQ.

But total capital invested increased 9%, and the average deal size improved from $6.9M to $10.4M, driven primarily by outliers in the Series B+. Comparing Q3 2023 to the same quarter in 2022, total deal count was down 33%, from 8,482 to 5,647, and capital invested down 7%.

Total Funding – Europe, US, Latam all up

Europe had a 22% increase in overall capital invested QoQ, the third consecutive quarterly increase since Q1. Meanwhile, US funding increased 7%, and Latam increased 2%.

Seed Stage Deals Drop

Global seed deals done had been steady in H1 2023, at ~1,900, but Q3 decreased sharply to 1,351 deals, a decline of 27%.

Bigger but Fewer Series B+ Deals

Overall funding at the Series B+ improved from $41.1B to $49B QoQ, but deal count fell to 3,012 from 3,760, reflecting bigger rounds to the lucky entrepreneurs with proven market-fit and growth.

Q3 Major Topics

Now, we move on to the major areas that caught our attention in Q3: IPOs, AI, Climate Tech, and Profitability.

IPO activity

The IPO market awoke from its long slumber in Q3, up 24% from the previous quarter

Notable IPOs of Q3 (and possibly of this entire year):

  • Instacart, the grocery delivery company’s long-awaited IPO took place in September, priced at $30 per share and valuing the company at $10B.
  • Klaviyo, who offers marketing automation, secured a valuation of $9.2B in its IPO debut with shares priced at $30 per share.
  • Arm, the AI chip maker, listed at $51 a share, valuing the company at over $54B.

Artificial Intelligence: Is the Hype Holding Up?

VCs Poured $17.4B into AI companies in Q3, up from $12.2B in Q2.

In doing so, we are and have always looked for the same things: an unstoppable founding team with a unique understanding of a real problem, operating in a large and growing market with a path to true defensibility.

Today, the problem and opportunity ahead at the Gen AI stage is the high cost to run Large Language Models (LLMs).

VC perspective

CLIMATE TRENDS IN EUROPE

Otto Birnbaum of Revent out of Berlin, is focused on finding early-stage entrepreneurs tackling today’s most challenging climate and societal problems. Here is his take:

Founder perspective

OVERWHELMING INVESTOR INTEREST IN GRID MANAGEMENT

Alberto Mendez of Plexigrid, based out of Sweden, believes we are hitting a mission-critical moment in climate, in part due to the acceleration of EV adoption.

Concluding Thoughts

Deal volume may not be increasing as much as the VC community would hope, but there is enthusiasm for founders executing on sustainable business strategies with proven market fit. And while AI and climate tech companies have been absorbing the lion's share of top deal activity and headlines, we are content to see far less tourists of entrepreneurship. Founders with their heads down building, resiliently weathering the slowdown, are more focused than ever on their customers, and proving strong business fundamentals. These entrepreneurs are poised to be in a fantastic position when they are ready to raise.