Venture Capital Benchmark Q3 2023
US, EUROPE, LATAM
2023 on pace to mirror 2019 VC in global funding
The VC community has many catchy terms to define the past two years relative to 2021: a regression to the mean, a return back down to earth, VC winter, and so on. In general, there is consensus that this “reality check” was a necessary market correction. But it’s not without pain, as many founders face long investment cycles, an increasingly high bar for funding, and slower sales cycles. Bridge rounds, restructuring, many smaller M&A activity, and going into cockroach mode while founders aim to hit meaningful milestones are true signs of the times.
With YTD numbers, we try to extrapolate how this year might end. Total funding is on track to have come down from 2022, but is on par with 2019 – indeed, returning to the mean. In the Q3 2023 VC Benchmark, we dig into the nuances around Seed to Series B+ across the US, Europe and Latin American markets, with voices from the trenches – founders and investors. In terms of quarter-over-quarter results, we’re happy to see an uptick in funding going to Series B+ companies, and a warming of the IPO market.
Welcome to the Q3 VC Benchmark.
Q3 Key Takeaways from TheVentureCity
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.
Elizabeth Piñon, Partner here at TheVentureCity and former hyper-growth startup operator, always has her ear to the ground. She is constantly in touch with early and mid stage founders as well as investors from across the spectrum. Here she shares her view from the investor chair to start us off:
Not great, but not all bad
Venture Capital deal count continued on a downward trend since the beginning of this year, and continued to drop 27% QoQ.
Europe had a 22% increase in overall capital invested QoQ, the third consecutive quarterly increase since Q1. Meanwhile, US funding increased 7%, and Latam increased 2%. Consistent with the norm, the total deal count in the US was almost double that of Europe; 3,505 deals in the US compared to 1,869 in Europe and 197 in Latam.
Global seed deals done had been steady in H1 2023, at ~1,900, but Q3 decreased sharply to 1,351 deals, a decline of 27%.
Overall funding at the Series B+ improved from $41.1B to $49B QoQ, but deal count fell to 3,012 from 3,760, reflecting bigger rounds to the lucky entrepreneurs with proven market-fit and growth.
Q3 Major Topics
Now, we move on to the major areas that caught our attention in Q3: IPO’s, AI, Climate Tech, and Profitability.
The IPO market awoke from its long slumber in Q3, up 24% from the previous quarter
Notable IPOs of Q3 (and possibly of this entire year):
This year, tech stocks have rallied, giving founders and investors confidence to consider filing for a public listing. We are cautiously optimistic that barring any further rate hikes in the short-term, the IPO market will remain open and increase in activity in 2024.
Instacart, the grocery delivery company’s long-awaited IPO took place in September, priced at $30 per share and valuing the company at $10B. The valuation was significantly lower than that of its previous private funding round, which valued the company at $39B. The stock price traded at $33.7 per share on the first day of closing, but has declined since.
Klaviyo, who offers marketing automation, secured a valuation of $9.2B in its IPO debut with shares priced at $30 per share. The share price reached a peak of $34.50 on September 29 this year, and has remained fairly stable since.
Arm, the AI chip maker, is the biggest IPO news of the year, who listed at $51 a share, valuing the company at over $54B. Arm’s impressive list of customers includes the likes of Apple, Google, Nivida and Samsung, among others.
VCs Poured $17.4B into AI companies in Q3, up from $12.2B in Q2.
Fittingly, we don’t see this as a passing fad, because we also don’t view AI as a “vertical” or a means to an end. Harnessing Gen AI is a new unspoken expectation for every high-growth startup.
Profitability: Should it matter?
Our friend Luis Cervantes, Managing Director at General Atlantic, shares his take on growth stage investing:
Fundraising by Geography
US edges up just 6% in funding
Q3 capital invested improved slightly, from $37.3B to $39.8B QoQ, while deal count came down 24%.
Leura Craig, Managing Partner at Outlander VC and former founder, shares her take on Seed-stage fundraising dynamics today.
Volume sinks, but funding surges
Europe saw its lowest deal count for more than a year, with a total of 1,869 deals in Q3 2023, a 33% drop from last quarter.
Deal count slides, but funding improves
Deal count has been decreasing since Q1, but average deal size saw a 47% improvement from $3.7M in Q2 to $5.5M in Q3 2023. In Q3, 197 deals were done and $1B invested.
Raphael Avellar of BrandLovrs, a serial founder based out of Brazil, is building in the Creator Economy space. We backed him at his Seed round led by Canary. Here, he breaks down 1) what it takes to raise a Seed vs Series A, and 2) the regional vs. US investor profile.
Fundraising by Stage
Early stage sees a pullback
With a decrease in capital invested and deals, this marks the lowest amount of capital invested since the beginning of 2021.
That said, the average check size increased to $3.4M the last quarter, the highest in comparison to any other quarter this year.
An increase in average deal size could indicate founders raising Seed plus rounds or extensions, instead of a Series A during a tough fundraising climate.
The trendline is nearly identical to the seed stage
There was a 23% decline in total capital invested from Q2 to Q3 2023 and a drop in deal count by 28%.
The Series A stage remains a tricky one to decipher due to the varying round sizes and how it is interpreted across different markets. As it has been the trend for all other stages, Series A saw the highest average deal size of the year in Q3 as well, with $19.7M.
Good news for Series B+
It’s good news out there for later-stage growth companies
Remember how the later stage suffered in Q2 2023, not just with total capital invested but also with average round sizes? That trend seems to have reversed in the past quarter, where Series B+ investments saw a 19% increase in total funding QoQ, with $49B invested in Q3 2023.
The range in average deal size is wide. In Q2 2023 the average deal was $10.9M, but for Q3 it increased to $16.2M, a sizable 48% jump. A significant portion of late-stage funding went to industries that are capital-intensive by nature, such as biotech, energy, and life sciences. YTD 2023, the Growth-stage capital in 2023 is flowing to proven businesses with strong market fit, a stark change from the exuberance of 2021.
But this year’s winter, compared to 2022, has the tailwinds of the public markets, giving confidence to fund the soon-to-be unicorns. S&P is up 14% compared to its 19% drop in 2022 (Reuters). And the “magificient 7” tech stocks gained 92%; Apple, Microsoft, Alphabet, Amazon.com, Nvidia, Tesla and Meta (CNBC).
Industry Spotlight: Climate and Clean Tech in Europe
Electric vehicle infrastructure and clean energy dominate
Take a look at the 10 biggest deals of last quarter (which represent 16% of all deal value), and you’ll see electric vehicle infrastructure and clean energy are carrying the load. 5 / 10 mega-rounds were focused on the EV industry, and 2 were devoted to clean energy (CB Insights).
And the fury of EV investing comes with good reason, given regulatory tailwinds. By 2030, the US has set a goal for half of all passenger vehicles to be zero-emission or plug-in. The European Union expects 100% of new cars to be zero-emission vehicles by 2035 (NPR). Batteries are the most integral part of an EV, but a close second is the steel with which they are built, which clearly explains the “why” behind the below investments:
Swedish-based Northvolt raised a $1.2B, to supercharge the growth of their battery development and manufacturing, specializing in lithium-ion technology for electric vehicles. For them, it’s not just about building batteries for the EV industry. They develop them into solutions that power everything from motorcycles and mining machines, to energy storage systems and ferries.
Swedish-based H2 Green Steel raised a cool $1.6B Series C to help them clean up steel, one of the dirtiest industries and responsible for more than 7% of the world’s global CO2 emissions. Their aim is to reduce carbon emissions from steel production to 0.
Verkor raised a massive $913M Series C. Founded just recently in 2020, they are powering low-carbon battery production in France and beyond.
But don’t ask us, ask our expert founders and investor friends who are exclusively focused on climate technology.
Otto Birnbaum of Revent out of Berlin, is focused on finding early-stage entrepreneurs tackling today’s most challenging climate and societal problems. Here is his take:
Alberto Mendez of Plexigrid, based out of Sweden, believes we are hitting a mission-critical moment in climate, in part due to the acceleration of EV adoption. He has spent his entire career devoted to the field of renewable energy and sees the grid as the bottleneck to widespread EV adoption. His take on the space:
As always, we look to assess what’s happening through a data lens. On that note, here is David Smith, our Chief Data Officer shares his take on the Q3 findings.
Deal volume may not be increasing as much as the VC community would hope, but there is enthusiasm for founders executing on sustainable business strategies with proven market fit. And while AI and climate tech companies have been absorbing the lion's share of top deal activity and headlines, we are content to see far less tourists of entrepreneurship.
Founders with their heads down building, resiliently weathering the slowdown, are more focused than ever on their customers, and proving strong business fundamentals. These entrepreneurs are poised to be in a fantastic position when they are ready to raise.