Securing venture capital in the United States is much tougher this summer, with total investments down by almost half year-over-year, according to the latest data from Pitchbook.
What’s even more concerning for founders? Early-stage startups are feeling the pinch the most.
After reaching a pandemic high of nearly $100 billion in Q4 2021, venture capital investments dropped to just $39.8 billion in Q2 2023. The number of funding deals is also down by almost a third since Q2 2022, with VCs making 3,011 startup investments last quarter.
Despite fewer deals and lower totals, U.S. startups are actually on track to raise about the same amount as they did in 2020. This suggests that, rather than a typical downturn, the VC market is mostly correcting itself after a surge of pandemic-era investments.
A correction—not a panic?
As Pitchbook analyst Kyle Stanford told Bloomberg, there were “probably too many” deals happening during the “heady days of the pandemic boom,” and that “slowing down the pace of new startups is probably a healthy thing.”
This approach is even more relevant now, as we see the aftereffects of the pandemic-era VC spending boom. Many companies are having to rethink their capital strategies—and even consider layoffs—to match the more realistic valuations of 2023.
Other factors are also at play in the Q2 slowdown, including higher borrowing costs, corporate belt-tightening, and a relatively quiet IPO market throughout 2023.
We also can’t ignore the impact of recent bank closures—mainly at boutique banks serving tech startups—on investor sentiment.
Even so, US VC fundraising totaled just $33.3 billion in the first half of the year, putting 2023 on track for the lowest annual total since 2017.
On the other hand, acquisitions—especially in traditional and generative AI—are on the rise in 2023 (for example, Databricks’ $1.3 billion acquisition of MosaicML).
What does this mean for startups? It’s time to look at non-dilutive funding options.
While most founders see VCs as key partners in their journey, they’re not the only way to fund your business and extend your runway. This is especially true for startups investing heavily in innovation and making R&D a core part of their product strategy.
Even with recent uncertainty around amortization and capitalization rules from the 2017 Tax Cuts and Jobs Act, there are still plenty of federal R&D tax credits (like Section 41) available to U.S. startups—helping you offset research costs without giving up equity.
Canada is a global leader in innovation funding, with the federal SR&ED tax credit program and a wide range of grants and provincial programs designed to help Canadian startups grow.
Want to learn more about these funding programs, the current state of venture capital, and practical tips to optimize your capital strategy? Subscribe to the Boast AI blog today.
