Global startup funding declines in 2023, falling to a 5-year low, despite AI boom

2023 concluded with global startup funding reaching its lowest point in five years , totalling $285 billion — marking a 38% decline year over year, down from the $462 billion invested in 2022. 

The final quarter of 2023 underscored the year's challenges, registering as the lowest quarter for global venture funding. Seed funding declined but remained the most robust stage for new companies, although the difficulty in raising Series A rounds led to an uptick in follow-on seed funding. 

Cutbacks were deep across all funding stages globally: early-stage funding in 2023 was down more than 40% year over year, late stage by 37%, and seed over 30%. 

A quick look at the US 

The U.S. — the largest startup investment market with about half of all venture funding — mirrored global trends: funding to U.S.-based startups in 2023 totalled $138 billion, down by 37% year over year . 

Investors deployed capital more sparingly, with a higher bar at each stage. This has been attributed to several factors, including a cooler IPO market, less favourable valuations, and a general tightening of economic conditions. This pullback has affected startups across various industries, compelling many to streamline operations and prioritize financial sustainability over rapid growth. 

European funding plummet

European startups are reported to have raised significantly less cash in 2023 than they did last year, according to a report from venture capital firm Atomico . The annual State of European Tech report found that startups raised around $45bn (€41; £36bn) in 2023, down from $82bn in 2022. 

The UK has lost the largest share of VC funding in Europe over the last three years, with the report showing that the amount invested from 2021-2023 fell by 2.6% on its share from 2018-2020. "The report underscores a persistent challenge in the European startup landscape: a heavy dependence on capital from outside the continent for later-stage funding," wrote tech investor Kevin Tan on LinkedIn. 

Almost 27 percent of all capital invested in European tech in 2023 comes from the Carbon and Energy sector , doubling its share of investment since 2021. This shows the increase of the capital investment behind green transitions. This dominance of the Carbon and Energy sector is present across almost every major European country, while it's the highest in the Nordics, representing 48 percent of all capital invested in Norway and 44 percent in Sweden.

AI boom  

Amidst the broad funding pullback, AI emerged as an outlier, with global funding for AI startups climbing to nearly $50 billion , a 9% increase from the previous year. The AI industry globally has seen a dramatic escalation in its market value, skyrocketing to an impressive $240 billion in just three years. 

Significant capital injections were directed towards leading AI companies, with foundation model companies like OpenAI , Anthropic , and Inflection . 

AI startups in Europe raised $5.8 billion last year , which includes funding to foundation model companies Aleph Alpha , based in Germany, and France-based Mistral AI . Other large rounds were invested in France-based AI code developer Poolside , German-based translation AI DeepL , and London-based generative video company Synthesis . 

Funding vs stages   

The landscape of startup funding in 2023 was distinctly marked by variations across different stages of investment: 

• Seed funding 

Seed funding (consists of seed, pre-seed and angel rounds) totalled $7 billion in Q4, down over 20% year over year from $9 billion.  Despite the cutbacks of funding at seed stage, it is seen to be the most robust funding stage with new companies being funded. As it became more challenging to raise a Series A round, companies were more likely to raise follow-on seed funding. 

• Early-stage funding 

Early-stage funding (Series A and B) declined the most in 2023 compared to other funding stages. For instance, in the 4th quarter, early-stage funding came close to $23 billion, down a tad quarter over quarter, and down 32% year over year from $33 billion.  This led to investors' preference for more mature, lower-risk ventures, leaving early-stage startups, typically associated with higher risk and longer paths to profitability. 

• Late-stage funding 

Late-stage funding (Series C and above) fluctuated throughout 2023 as large fundings went to AI, semiconductor, battery and clean energy companies. As of the fourth quarter, it was 25% of the volume of the peak in Q4 2021. 

2023’s fallen startup stars 

As funding declines, more and more startups are laying off workers and even closing their doors, as recent reports have shown. A report last month by The New York Times said that approximately 3,200 venture-backed firms in the U.S. went out of business in 2023. The figure was likely on the low side, as many businesses had shut down with little public notice. Even well-funded and innovative ventures were not spared, leading to the downfall of several promising startups globally. 

Here are some fallen stars: 

• Babylon – United Kingdom 

Founded in 2013, Babylon emerged in the UK as a pioneering force in digital healthcare and reached a peak in June 2021, going public at an astounding €4 billion. Despite its revolutionary model and significant funding, by 2023, it faced with massive debt and dwindling cash reserves, dramatically filed for bankruptcy and was eventually sold for a surprisingly low €620K , marking a stark descent from a celebrated unicorn to a cautionary tale in the volatile startup landscape. 

• Unu – Germany 

Founded in 2014, the Berlin-based e-scooter startup ‘Unu’ sought to revolutionize urban mobility with its stylish, emission-free electric scooters, complete with portable batteries. They raised over €39 million to create a solution that fully connected people to the city. The company stated officially filed for bankruptcy in November 2023. Reasons for the bankruptcy include increased material and transport costs, higher operational costs, and significantly decreased demand due to inflation. 

• Zume – US 

The $500 million robot pizza startup Zume, has shut down in 2023 , after 8 years in business. Backed by Softbank, Zume drew $446M to disrupt the pizza industry —to equip delivery trucks with robotic pizza-makers and smart. However, after pivoting to sustainable packaging development in 2020, difficulties in raising any additional funding among other financial problems led Zume eventually to its departure. 

2024 startup funding outlook 

In 2023, startups faced a challenging funding landscape as the venture capital markets are still reckoning from the 2021 funding boom. Investors were becoming more conservative and setting higher bars for each stage of investments, Crunchbase noted. 

As a result, companies were tightening budgets and focusing more on unit economics and the tech sector experienced a significant rise in layoffs during 2023. Furthermore, it is anticipated that the layoffs seen last year would lead to more company closures in 2024. 

Geopolitical issues, inflation reigniting, cost of living crisis among many other factors, 2024 is expected to be another challenging year for founders. However, for now, many who invest in the market seem hopeful 2024 will bring better — maybe just slightly — things than the past couple of years. 

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