‘Scary Signs’ from Tech Startup-Ville, Crunchbase Says

Venture capital investment in the tech startup ecosystem is plummeting, particularly in the seed and early stage funding rounds, industry watcher Crunchbase says in its monthly report issued today.

Investors ponied up $18.6 billion in July 2023, about a 20% month-over-month decline from June and a 38% decrease compared to July 2022, when $29.8 billion was invested globally in July 2022, Crunchbase said in its monthly report today.

“Notably, seed and early stage funding hit its lowest amount in a single month since we began tracking the downturn in July 2022,” the company says. “That’s a scary sign for the startup ecosystem as a whole, since earlier funding stages had remained relatively insulated at the start of the downturn.”

Soon after the reset in startup valuations began in December 2021, investors signaled they would “pivot away” from late-stage investments and plunk their money down on younger companies that would take years to develop. However, that pivot didn’t last long, as investors began to close off the spigot on the “previously robust” early stage startups through 2022.

“By the third quarter of 2022, early stage funding fell,” Crunchbase says. “In the fourth quarter, it became obvious seed funding wasn’t safe either.”

The level of investment has continued to trickle downward through the first seven months of 2023, raising fears that the “handoff between investors at each stage is broken,” Crunchbase says.

“Seed- and early-stage startups face a reckoning if they are not able to raise funding on a two-year cycle,” the company says. “As investors cut back, startups funded during the market peak face closure at greater rates.”

Source: Crunchbase

All this is happening against the backdrop of one of the biggest things to hit tech in recent memory: Generative AI. Thanks to the consumer success of ChatGPT, businesses are rushing in to develop their own GenAI solutions and reap the benefits of automation before their competitors do.

“Nearly a fifth of total global venture funding so far this year has come from the AI sector alone, per Crunchbase,” Crunchbase News’ Gené Teare wrote last month. “It’s safe to say that without the AI fervor kicked off by the launch of OpenAI’s ChatGPT in November, venture funding so far in 2023 would have been even lower.”

What does this have in store for the market as a whole, including non-AI companies? Some observers are suggesting that the entire seed ecosystem needs to take a “time out” to bring valuations down.

Crunchbase quoted seed investor Sam Lessin as saying that the market needs a 18-month timeout, and that investment won’t resume “until the inventory of dramatically over-marked late-stage private deals got worked through/washed out/expired on the line,” he says.

It could spell doom for “run-of-the-mill” tech companies, “which just aren’t worth that much it turns out,” Lessin says. “And if the bulk of so-called unicorns can’t get public/or do and are disappointing, the whole model of seed investing starts to look way, way less attractive as an asset class.”

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