Total funding for Philadelphia-area startups sank again in the fourth quarter after an unexpected jump during the three months prior, capping off a challenging and sluggish year on the venture market that could carry into 2024.
Local startups raised $498.53 million in the last three months of 2023, according to Pitchbook's Venture Monitor report, a 43.5% decline from the $866.7 million raised in the third quarter. In total, the region struck 85 deals, the lowest number since the third quarter of 2020.
Some $2.43 billion of capital was hauled in by Greater Philadelphia startups throughout 2023, a 53.5% decline from the $5.23 billion raised in 2022. For context, the full-year total in 2023 was less than the $2.5 billion raised in three months during the second quarter of 2022 alone.
Since then, however, the market has been mostly in decline. Total capital raised in the fourth quarter returned to levels seen in late 2022 and early 2023. From the fourth quarter of 2022 to the second quarter 2023, the Philadelphia-area startups raised just over $503 million per quarter on average.
Nationally, startups raised $170.6 billion in 2023, a 30% drop from the $242.2 billion raised in 2022, and the lowest yearly total since 2019. Eye-popping fundraising rounds of 2021 and 2022 were clearly outliers due to the pandemic and shifting technology habits.
Looking ahead, experts are tempering expectations for a major recovery on the venture market in 2024. Pitchbook says in its latest Venture Monitor report that although a further decline in the venture market isn't likely, "we could witness a lackluster 2024."
"The overall outlook for US VC in 2024 is for the market to remain relatively subdued," the report reads. "A rebound in fundraising is unlikely, given the returns of the past couple years. However, the market remains full of dry powder, and companies with strong financial metrics will continue to get funded."
Touchdown Ventures co-founder and CEO David Horowitz said he expects the venture market to rebuild "gradually." He said there is "a lot of capital on the sidelines" from venture funds that were raised from 2020 to 2022 that is now waiting to be deployed. Touchdown Ventures, which works with corporations to manage their venture capital funds, is based in Philadelphia with offices in San Francisco, Chicago and Los Angeles.
Horowitz expects deal activity to increase in 2024, but said that may mean that startups will have to raise down rounds. Founders who pushed off raising money at a lesser value than their previous round could be strapped for cash and need to return to the market in the coming year, Horowitz said.
"Inevitably, there's supply of capital, there's also going to be more demand for capital," Horowitz said. "There are a lot of startups that because they were concerned about their valuations and didn't raise last year, now either they're going to go out and try again or they kind of run out of options, and they have no choice but to take a hit on valuation."
Down rounds can bring a bit of a stigma for startups, but Horowitz said it may be a necessity for companies reaching make-or-break points. There was an uptick in down rounds from 8% in 2022 to 20% in 2023, according to the Venture Report.
"A lot of founders, even other VCs don't like to have down rounds or VCs don't like to have write-downs, but that's OK" Horowitz said. "It's just like the stock price — you might invest, the stock might go down. But it's really about how you finish and how you grow over a long period of time."
Once valuations come down from the inflated levels brought on by the huge fundraising rounds of late 2020 to early 2022, and once more startups bring their products to market, Horowitz said "money starts flowing back into venture markets."
The market could open up at any point during the year, Horowitz said, noting it could also be another year of weathering the storm for startup founders.
"Things are probably going to get better in 2025," Horowitz said. "If you can figure out a way to continue to make it, continue to show those revenue and growth milestones, you're going to be at a good spot."
