Venture Capital Benchmark Q2 2023
US, Europe, AND Latin America
It’s always darkest before the dawn
The phrase “it’s always darkest before the dawn” has literal and psychological meaning. Penned by Thomas Fuller, an English theologian, in 1650, he meant that literally the darkest moment of the day is just before the sun peaks its head over the horizon and illuminates the sky. However, the phrase has gained popularity in the centuries since as a rally cry to motivate pioneers to overcome monumental obstacles with seemingly no end in sight. The phrase alludes to that often just before massive triumphs, people face their greatest challenges. That very well may be where we are today for startups across the world.
From hundreds of conversations we have had this past quarter with founders, investors, and ecosystem members, a common thread continues to arise: founders are resilient by nature and strive to achieve success, but the road, especially this past year, has been difficult. It’s no secret market conditions have been unsupportive for exponential growth, and many founders find themselves weathering the storm rather than taking massive risks.
We are confident the founders that are able to survive and continue forging ahead will be handsomely rewarded. We have already seen startups fold over the past couple quarters, and unfortunately we expect more will do so. For the founders who build companies grounded in product, with lean teams and positive unit economics, and foundations to scale when capital is more readily available - they will grab market share and expand at record paces. We are excited for the future and to support these generational companies.
Welcome to our Quarterly VC Benchmark Report, where we analyze all of the startup and investing activity over the past 3 months and stack it up against what we saw in the previous quarters and years. We scan across the US, Europe, and LatAm to bring you the best insights, be it you are an investor, founder, or just interested in the startup investing space. Let’s dive in.
The biggest headlines
Many startups right now need perspective on where we are in this market cycle and what lies ahead. We will provide some clarity around this topic as we break down where we are headed in the second half of 2023.
Juan Ignacio, Founder of Boopos and one of our portfolio founders, has his finger on the pulse regarding startup performance and fundraising. He is in the business of helping startups get acquired by providing M&A financing. Juan had this to say when asked about what investors are looking for in startups to purchase:
Juan provides some key points of advice: focus on execution and people. The companies that can effectively deliver on their product and growth in between fundraises, while assembling the teams to execute on their long-term visions, will have the best chance to raise capital when the time comes.
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 displocations. 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. AI is finally realizing its potential as a horizontal tech enabler to disrupt virtually every industry and make products better.
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. This pace is so fast that many well-regarded AI experts are calling for a 6-month pause on experiments in AI beyond GPT-4 so regulation and the public can catch up and prepare for the progress (or regress) that is upon our doorstep. However, innovation is hardly containable, best exemplified with the recent launch of Auto-GPT which can autonomously run AI prompts to achieve an end goal with little to no human intervention. Combine that with the marginal cost of energy and computing going to zero, founders have unbelievable technological resources available to them to build incredible products.
For a year now, relatively stable funding volume
Despite how headlines evolve, numbers and figures tell a more concrete tale. 2021 and early 2022 were highlighted by extreme levels of overexuberance, where funding volume reached unsustainable heights and startups received capital with little connection to their quality of product and customer base. This produced $100B+ quarters with valuations climbing into the stratosphere, often despite lack of traction.
We have always been, and will always be, founder first. However, we cannot support every startup that comes through the door. Startups today must build lasting companies with products that customers demand and struggle to live without.
As Elizabeth Yin, co-founder of Hustle Fund, aptly put it:
When founders speak about today’s fundraising experiences and the challenges that come with them, they are absolutely correct that receiving capital now is tougher than a year ago. However, one must decipher the great companies who have reached product-market fit and raised rounds because they have sustainable, repeatable business models from the companies that would have not existed today without the bar being lowered 1 year ago.
When we identify those startups that are building generational products, we go to the ends of the Earth to ensure they thrive.
Lessons from Y Combinator
Nine months ago we published a living document: “Actionable tips for surviving an economic downturn” and many of the lessons are still relevant. We co-wrote this with our founder and investor network so founders could crowdsource best practices and ideas to survive the impending fundraising winter.
We have revisited those lessons, and drawn upon new inspiration from other trusted voices within our space. Y Combinator published YC’s Essential Startup Advice, lessons that ring true and are a must-read for any early stage founder in any market cycle. There are many great nuggets in the guide, but some of our favorites are:
Key market data puts the bulls and bears at odds
Entering 2023, the prevailing market sentiment was generally that trouble lies ahead as the Federal Reserve combats inflation. Few investors, if any, could have predicted what would transpire over the next two quarters. Fast forward 6 months (as of June 19, 2023) - the S&P 500 ended 19 percent higher than a year ago, 23 percent above its low in October, and roughly 8 percent away from a record high. So what is driving this rally?
Analyzing key drivers of performance can give us an idea of what’s ahead
Where are we now, and what can we expect going forward?
Data Deep Dive
Retention and expansion
In this market environment, we are hyper-focused on acquisition strategies and cash burn. Too often we see startups spending too much to acquire what they perceive as significant customers, only to fall short and have to go back to the product drawing board.
David Smith, Chief Data Officer at TheVentureCity, speaks to how he views long-term startup success from a data perspective. When he looks at startup data right now, he pays particular attention to customer retention and expansion.
If founders spend time on their most accretive channels and formulate product around retention and expansion (ideally through product-led growth), then David sees strong opportunity to raise further capital rounds due to customer stickiness.
Fundraising by Geography
More of the same
Founders across the US are looking for a return to 12-18 months ago, when capital was plentiful and investor appetite was abundant. There are reasons for optimism, but those reasons have yet to translate to fundraising numbers. The US produced $41.5B in fundraising volume across 3,449 deals last quarter, a -11% drop QoQ and -43% decline YoY.
Europe starts to rebound
In a turn of events, European fundraising activity ticked up in Q2 and was higher than the previous 2 quarters. Q2 saw $17.2B poured into startups across 1,591 deals, a 19% increase from Q1 and 9% increase from Q4 2022. This figure was supported by a few mega deals, particularly Verkor and H2 Green Steel, which raised north of $2.1B and $1.6B, respectively. Although Q2 underperformed on a YoY basis, that isn’t the takeaway here.
Finally some good news for Latin America
Since Q2 2022 the narrative for LatAm has been consistent: worsening market conditions led investors new to the region to pull out in favor of sticking to what they know: investing locally. Hopefully, we are seeing that trend reversing and Latin America gaining back the fervor of the investor community.
Ecosystem member perspective
South Summit Spotlight
TheVentureCity caps off South Summit with a bang
Laura González-Estéfani, Founder and CEO of TheVentureCity, has long realized there is a special bond between Miami and Madrid. In Refresh Miami’s article, she outlines how she landed and built TheVentureCity in Miami, with Madrid as our European hub. Both cities are Spanish-speaking, abundant with talent, and share a mutual ecosystem where people in tech find themselves bouncing back and forth between the two cities.
South Summit, one of Europe’s largest and most important tech conferences, occurs every year in Madrid. We always enjoy seeing friends and familiar faces come into town and catching up. This year we took South Summit to the next level considering it had been three years since we had seen our entire European ecosystem in one room together.
We gathered the entire TheVentureCity team, founders, investors, and others from the ecosystem to throw a tech party with over 300+ attendees. It was an amazing way to cap off the conference and we hope to host you again in Madrid next year!
Women in VC
When the rest of the market sank, female-founded companies held firm
Sometimes no news is good news. When the rest of the US market was down -11% from Q1, female co-founded startups raised $6.7B across 689 deals, the same volume as last quarter. This indicates some level of progress in relation to the industry, but there is not much to celebrate. So far in 2023, female co-founded companies represent 18.1% of all US VC dollars raised and female founded teams have raised 1.9% of the total US pie, down from 2.1% in 2022.
The main takeaway: female co-founded companies have not seen much negative change over the past 3 months, but clearly little has been done to more actively support female founders.
Despite the generally negative news around capital deployed for female founders, there was a nugget of inspiration in the space. A true trailblazer and veteran, Itxaso del Palacio, General Partner at Notion Capital, has been an active investor in the European VC ecosystem for over a decade. We are happy to see that she and her partners successfully raised a $300M Fund V, even in this difficult fundraising environment. She was also promoted to General Partner, a huge milestone! She comments on that experience and how she will go about deploying this new fund over the next 3 years:
Industry Spotlight: Artificial Intelligence
Moving at the speed of light
A mix of incumbents and new entrants are catapulting the space forward
Where does the true value in the AI space lie?
AI is moving at the speed of light, and we are excited by future advancements in this already fascinating space. By using market and product approaches in a complementary way, we aim to find the best founders building useful products in spaces that desperately need more efficiency and better customer experiences.
Fundraising by Stage
Seed Funding in Q2 '23
Seed stumbles slightly
In line with the rest of the VC market, seed saw a slight decline in fundraising volume and deals. Seed deals represented $4.6B in Q2 2022 across 1,229 deals, down -9% from Q1 and nearly half of volume one year ago. Despite the drop in volume and deal count, it wasn’t all bad news for seed companies.
Seed fundraises saw a lift in average pre-money valuations ($16.9M) and deal sizes ($3.8M) QoQ. This tells us something: for the seed deals that do get done (of which there are less), they are getting the valuations they command due to strong investor appetite at this portion of the VC market.
Early Stage Funding in Q2 '23
Series A and B companies still weathering the storm
This market has proven unforgiving for companies beyond the seed stage. Series A and B investors have continued their retreat from early 2022 levels and continue to deploy less capital into new companies entering early VC stages.
Companies that have received pre-seed and seed funding rounds are elongating runway and raising extension rounds, plus anything else they can fathom to weather the storm when capital becomes more readily available.
Investors deployed $8.2B across 338 deals into Series A and B startups, down -15% from Q1 and -62% YoY. Average deal value was actually up QoQ to $24.2M, but that was the only bright spot in an otherwise difficult fundraising environment.
Andy Areitio, General Partner at TheVentureCity, is on the ground floor speaking with early stage founders every day. He acknowledges the difficulty in the market, but from his conversations foresees opportunity on the horizon:
Late Stage Funding in Q2 '23
Late stage deals rebound, but the devil is in the details
Late stage deals surprisingly came back in a big way in the second quarter. Q2 produced $21.3B in deal volume across 162 deals, up 139% QoQ. This deal volume is still below the record-breaking quarters of 2021, but still higher than any of the past three quarters.
The reason for this massive jump is a few outliers skewed the data: Stripe’s massive fundraise got reclassified to Q2 from Q1, and Verkor and H2 Green Steel’s fundraises accounted for $10.6B total volume. These 3 deals represented 50% of the quarter’s deal volume - hardly an indicator of future momentum moving forward.
However, one cannot discount that the numbers did not decline QoQ and other factors may indicate there may be positive things to come at late stage.
A mixed bag of trends spells uncertainty at late stage
There remains much to be excited about when evaluating the world of startups. The past year has certainly levied its share of challenges. However, we see reasons for optimism. Macro trends seem to be turning (however too early to say, we will know more in 1-2 quarters) and the public markets are starting to respond. Startup founders are finding creative and novel ways to build their companies with less burn and more productivity (see: AI).
We are seeing some stirring across investment stages where the investment bottom has potentially been reached. Lastly, AI presents a whole new opportunity to develop and fund companies with more attractive value propositions. The past year has been difficult. However, we look to the future with excitement as we believe some of the best companies of the decade are only yet to come.