That Sound You Hear Is VCs Shutting Wallets, Tucking Them Back Into Patagucci Vests

Year-over-year global VC funding dropped precipitously in Q1 2023, with at least $76 billion (£61 billion) doled out to companies at all startup stages. That may sound like a lot but it's a 53 percent drop from the same time last year, reports funding tracker Crunchbase.

And bear in mind, that $76 billion includes $10 billion Microsoft gave to OpenAI and $6.5 billion in funding awarded to Stripe, meaning the rest of the VC funding pool in the first three months of the year was closer to a measly $60 billion, Crunchbase said.

While part of the decline can be attributed to the collapse of Silicon Valley Bank in early March, Crunchbase said the bank run was more like adding insult to injury, as the funding environment was weakening throughout 2022.

That's no surprise given the outlooks and forecasts for the tech industry of late. Venerable Silicon Valley incubator Y Combinator's summer 2022 cohort was 40 percent smaller than the prior winter round, which the firm told us was an intentional move due to the state of the economy.

Likewise, hardware sales have plummeted, as has semiconductor spending amid uncertain times, rising inflation and interest rates, the end of cheap money, corporate hoarding of profits, nations staggering out of a pandemic, and other effects.

Seed funding dropped by 44 percent YoY in Q1, which Crunchbase said is significant because of how much it differs from what happened in 2008. Back then, risk-taking VCs still managed to bankroll startups such as Slack, Square, Airbnb, and Uber.

Unfortunately, VCs may be taking a more cautious approach this time around. In Q4 2022 alone, global seed funding dropped by more than a quarter. Early-stage funding has also taken a hit, with a 54 percent drop year-over-year in Q1 2023 to $25.6 billion.

As for late and large-scale VC funding, that's down considerably year over year in Q1 as well, though the two aforementioned big investments (OpenAI and Stripe) managed to lead a quarter-over-quarter late stage increase from the end of last year to now. 

"The billions of dollars raised by OpenAI and Stripe made up 22 percent of all venture capital raised this past quarter, and 38 percent of late-stage financings," Crunchbase said. 

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While investors aren't spending, that doesn't mean they lack cash. Crunchbase said VCs are still sitting on huge amounts of dry powder, but simply aren't making the deals they were before the pandemic, back when the economy was turbo-charged with virtually free money.

They're still spending a bit, though, and like the cloud in 2008, much of this wave of innovation investment seems to be focused on artificial intelligence. Crunchbase said several AI companies raised seed money in Q1; companies tagged with AI in Crunchbase accounted for 19 percent of invested funds in the first quarter.

As for where most of that cash is going, geographically speaking, it looks to be staying in the US. Despite North American VC investments also declining 46 percent year over year in Q1, companies in the Americas brought in at least $46.3 billion out of the global total of $76 billion in investments - some 60 percent of first quarter spending. 

According to Crunchbase's Joanna Glassner, who wrote about US VC funding in Q1, those first quarter numbers mean those hoping for an end to the slowing trickle of venture funding should keep hoping. 

"So far, markets are off to a rocky start in April," Glassner said. In the meantime, companies looking to score some VC cash have a clear recipe in front of them: just inject a little AI hype. ®