So far we have published quite a number of articles in which a list of negative trends can easily be put together. But, from another point of view, the positive signs seem to be getting brighter, and that's something to keep in mind.
There are good reasons to believe that the massive correction in VC activity that we have seen over the last six quarters has run its course. More importantly, there may already be early signs that the recession in private market investment has bottomed out.
We are in the middle of a new normal adventure. Since the market falls of risk capital US have moderated in what appears to be a comfortable investment value range, it is possible that the current timing is not an aberration. Instead, the market as it is today is what people should expect in the future. That is a conservative view.
However, a brighter picture could also be painted. Look for more positive data to consider and remember some structural issues in the global economy that could improve technology valuations and early stage fundraising.
Green shoots for better days
Raising venture capital does not make a startup successful; building an ambitious, growing and profitable business does.
Regardless, given the way start-ups are built and run, venture capital activity can provide a useful indicator of a start-up's success, as it provides a measure of how bullish are the investors of the private market on the businesses they finance. Going one level higher, the totals of risk capital they can be considered a reflection of startup growth rates and how efficient they have been of late. From any perspective, more is better.
Once the relationship of risk totals and capital availability is established, the focus becomes that of a simple currency in motion. Risk totals tell us a lot about the market's views regarding the health of existing startups.
Now that we've established those correlations, let's find some green shoots. What follows are eight data points and trends that indicate good reason to maintain some optimism that the worst days for startup fundraising are behind us for now.
Depending on how you count, VC totals have bounced off lows
With $60.5 billion raised in the second quarter of 2023, global venture capital activity declined 13% from first-quarter 2023 levels, according to CB Insights. However, without OpenAI and Stripe's multi-million dollar rounds in Q2023, "Q14 XNUMX funding would have grown XNUMX% QoQ," CB Insights wrote. In particular, pitchbook introduced Stripe's deal in the second quarter of their own report, which in turn changes the global numbers (it's worth noting that PitchBook aligns with the US market).
Either way, if we remove the few peripheral businesses that weren't really related to the company, the second quarter looks promising compared to the first.
Transaction sizes grow by region
While the average size of venture deals decreased in the United States ($3,5 million), Latin America ($1 million) and Africa ($1 million) in 2023 from the previous year, deal sizes increased in Asia ( $4 million), Europe (record high of $2,6 million) and Canada ($3,8 million, another all-time high), and held steady in Australia ($3 million), according to CB Insights.
A modest mega-round of recovery
Deals that book $100 million or more are a mixed bag. Startups raised 108 nine-figure rounds in the second quarter of 2023, compared with 92 in the first quarter of 2023, but the value of those deals dropped to $23.300bn from $32.000bn, respectively, according to CB Insights. Sounds strange. Having more startups generating big rounds but adding a smaller amount? It is normal if you leave aside some of the offers of the first quarter (OpenAI, Stripe) that are not really risky.
With that approach, it looks like the massive venture rounds actually had a pretty massive impact in the second quarter.
more unicorns
There are more unicorns. With a bump from 15 to 18 you could say there is a modest improvement.
That's the number of new unicorns minted in Q2023 and Q20 XNUMX (based on data from CB Insights), respectively, generating a XNUMX% profit. You still see significantly fewer new unicorns being created this year compared to previous periods, but more billion-dollar startups as the year progresses is anything but bearish.
The offers are back
Acquisitions and mergers showed recovery near the end of the second quarter. Major deals such as IBM's acquisition of Apptio, Databricks' agreement to buy MosaicML, Reuters' purchase of Casetext, and ThoughtSpot's purchase of Mode Analytics indicate that a key exit window is opening for new companies.
Valuations are recovering
As the Fed slows down on interest rate hikes, tech valuations slowly climb back up. Not in large numbers and not too quickly, but there has been enough movement to warrant a positive view.
Macro pressures are easing
Inflation is coming down, too, at least in the US. That should limit future interest rate hikes, which will push the needle in favor of growth-oriented companies like tech startups and away from the safest and most boring assets. In turn, it could help valuations of tech startups, as well as their ability to conduct IPOs.
Tech layoffs are slowing down
We are seeing a steady decline in the number of tech layoffs. Fewer tech companies are being forced to lay off staff en masse, and this is positive for talent retention and acquisition.
