Venture capital research firm PitchBook Data Inc. projects a 2023 decline in startup funding activity, though it forecasts a strong year for early-stage investment deals.
Why this story matters: Investment capital raised by local tech companies can result in high-tech, high-wage job creation and the development of solutions that help other businesses.
This year was a strong one for local startups raising capital. Metro Orlando companies raised $385.5 million from Q1-Q3, more than the $304 million raised in that same timeframe in 2021, according to deals tracked by PitchBook and the National Venture Capital Association.
However, Q3 was Orlando’s weakest for startup investment in two years. Macroeconomic trends slowed the frenzied pace of tech investment that took off in 2020, and venture investment across the U.S. hit a nine-quarter low in Q3.
Next year, the number of venture investment deals and deal values will decline across the U.S., per Seattle-based PitchBook’s 2023 U.S. Venture Capital Outlook released Dec. 16. The report didn’t offer projected numbers for 2023, but PitchBook projects public markets uncertainty and a possible recession will slow the venture capital sector after two years of historic activity.
Regardless, startups still have the opportunity to raise capital in 2023 since VC and private equity funds still have money raised in 2021 to deploy, DeepWork Capital Managing Partner Kathy Chiu said. “However, anticipating less supply of capital, investment firms are likely to become more price-sensitive, so startups will need to be prepared for lower valuation-to-financial-metrics multiples.”
Here are other highlights from the report:
Seed-stage deals to strengthen
The forecast: The deal sizes and valuations for seed-stage startups will grow in 2023. Seed-stage capital is some of the earliest money startups raise, typically coming from angel investors, friends and family members. The median size of these investment deals this year hit a record high of $2.8 million, with the median company valuation also at a record high: $10.5 million.
What they said: “Seed-stage startups are more insulated from public market volatility than their early- and late-stage counterparts because they are at the most nascent stages of the VC lifecycle. In recent years, and more prominently following the 2022 economic downturn, investors traditionally allocating capital to late-stage startups have moved upstream, targeting the earlier stage to capture larger returns and secure access to promising startups… Should market conditions improve and paths to liquidity return, seed-stage deal metrics may stagnate or fall in response to larger check writers returning to their original investment strategies.” — Max Navas, venture capital analyst, PitchBook
Orlando outlook: Despite national headlines of tech layoffs and economic downturn in 2022, startup founders should not shy away from raising capital and building their businesses next year, Dennis Pape, CEO of seed capital investment firm SeedfundersOrlando, recently told Orlando Inno. “The best startups will have plans that anticipate these market conditions including being ever more capital efficient, raising capital with cash runway and valuation creating milestone considerations, and efficiently and effectively going-to-market.”
Money raised by VC funds will fall
The forecast: Fundraising by VC’s across the U.S is expected to drop to somewhere between $120 billion and $130 billion. That would be a decline from the $147.2 billion funds raised in 2021 and the $150.9 billion they raised in the first three quarters of 2022. Still, it would be stronger than any other year since 2006, the earliest data available from PitchBook.
What they said: “Despite US VC fundraising reaching a historic high in 2022, we expect a slowdown to occur in 2023 as LPs (limited partners) grapple with liquidity concerns and consider alternative investments in other asset classes positively affected by rising interest rates… Allocations to venture assets within an LP’s portfolio typically represent a small overall percentage; therefore, large reductions in allocations may not occur.” — Vincent Harrison, venture capital analyst, PitchBook
Orlando outlook: Next year, a “new normal” for venture fundraising will emerge, Nekeshia Woods, partner of Winter Park-based Parkway Venture Capital, previously told Orlando Inno. “For instance, large and small investors can be expected to align with venture firms that have a more differentiated investment thesis, like deep tech, emerging science, etc. There is an anticipation, the long-term allocations outlook remains positive and, while some portfolios will lower their venture allocation, significant swings in allocations are not expected."
Sign up here for The Beat, Orlando Inno’s free newsletter. And be sure to follow us on LinkedIn, Facebook and Twitter.
