VC funding drops 49% in Q2 while AI boom mints new unicorns

A new Meta (META)? A new Nvidia (NVDA)? You may have to wait awhile.

Though we’ve seen a number of high-profile investments in AI companies, the slowdown in VC funding has proven sticky, leaving many potential startups out in the cold, according to recent Crunchbase data.

In the second quarter of 2023, global VC funding fell 49% from the prior year, falling $65 billion in the second quarter from $127 billion in the same period last year. This also marked an 18% drop from the first quarter of the year.

For the first half of 2023, funding fell 51% to $144 billion from $293 billion a year ago.

VCs and startups have run headfirst into a high-interest environment that may be here to stay, while also grappling with a tech industry that has faced a reckoning after hiring rapidly during the pandemic boom.

“We anticipate that funding will continue to slow, but not by such a high proportion,” said Crunchbase senior data editor Gené Teare. “The steepest drop has been for late-stage funding, which will take longer to recover since large late-stage private companies generally were valued at multiples much too high compared to values for high-growth public tech companies.”

An AI boom pushed tech stocks higher in the first half of the year, and for venture-backed companies this pocket of the market proved to be the primary bright spot.

The AI boom made way for new unicorns, including AI company Runway, which in late June announced a Series C extension with buy-in from Alphabet’s Google (GOOG, GOOGL), NVIDIA, Salesforce, and other investors amounting to $141 million.

Additionally, Databricks recently acquired MosaicML, a challenger to ChatGPT-maker OpenAI, for a staggering $1.3 billion.

The end of the line?

Many startups are caught between a rock and a hard place. This past quarter, 6,000 startups successfully raised money, a sharp decline from more than 9,500 the same time last year.

“As investors are more selective in this funding climate, many of those startups will find it challenging to raise needed funding and as a result could shutter,” said Teare. “We’ve also seen other indications that more startups’ cash reserves are dwindling: In Crunchbase’s most recent quarterly startup survey, nearly one third of respondents who answered the question indicated that their startups have less than 6 months of runway left.”

Story continues

Most of tech’s biggest names began as startups, from Uber (UBER) to Alphabet, and conventional wisdom says that a downturn is a good time to build a company.

But that doesn’t mean it’s an easy moment to start a new company. And if struggles for startups continue we could see ripple effects across tech over time.

“Startups allow for thousands of experiments to be run, independent of how things were done before,” added Teare.

“That creates new markets and new opportunities. Since the beginning of 2022, close to $600 billion has been invested in startups across all stages. Large returns delivered by a small percentage helps power the entire sector. That’s why we follow them (and the money) so closely.”

Allie Garfinkle is a Senior Tech Reporter at Yahoo Finance. Follow her on Twitter at @agarfinks and on LinkedIn.

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