Why 2024 could be a make-or-break year for Seattle startups

With 2024 on the horizon, startups are bracing for a year of major change.

This past year brought a dip in venture capital funding but also fervor over artificial intelligence with tools like ChatGPT. For startups that raised money during the red-hot years of 2021 and early 2022, next year could be make or break.

“You will see more later-stage B’s and C’s and D’s start to happen, but I think you’ll also see more down rounds. I think you’ll see more M&A, and I think you’ll see more bankruptcies,” said Tim Porter, managing director at Seattle-based Madrona Venture Group. “A lot of companies that raised a bunch of money through the end of 2021 are going to have to raise more money. For most of 2022 and '23, they were able to just not raise.”

Porter added that a big reason there haven’t been many late-stage rounds recently was because those companies had enough money and didn’t want to raise in a less startup-friendly market, but those companies will be forced back to the table next year. Those that haven’t hit their goals could be in trouble.

Early-stage rounds, he added, have stayed relatively hot. Next year could also be the time for companies to go beyond experimenting with AI and embedding the technology into their products. Some of Madrona’s portfolio companies, according to Porter, are using AI to improve search functions and automate important tasks.

By the numbers

Seattle-area startups landed $2.7 billion across just under 280 deals through the first nine months of the year, according to Seattle-based PitchBook Data and the National Venture Capital Association. That’s far off pace from 2022, when local startups landed $7.8 billion across 479 deals. In 2021, local startups landed $9.2 billion across 494 deals.

Julie Sandler, managing director at Seattle-based startup studio Pioneer Square Labs, said although AI has ignited a fervor, it’s the timing of this technology with post-pandemic challenges in areas like mental health and education that is most compelling. Pioneer Square Labs also operates a venture arm, PSL Ventures.

“I’d say a good portion of pitches I am now starting to see touch upon themes of ‘doing well by doing good’ and tackle these problems head-on,” Sandler said in an email to the Business Journal.

A major catalyst for a healthier venture capital market is an uptick in initial public offerings. Public offerings are often how investors in venture capital funds get their returns, allowing them to continue investing in new funds that will end up fueling the next crop of startups.

Sandler said there is a pent-up demand for IPOs, but there are “whispers of notable upcoming filings.” She added that a few successful IPOs could improve the funding environment, and she hopes to see a couple by late next year.

Porter, meanwhile, said the IPO window is open, but public company investors have a high bar right now, meaning companies looking to go public will need very strong financials.

Kaidi Gao, associate analyst at PitchBook, agreed with this sentiment. She added that a rebound in IPOs depends on interest rates, and signals that rates could stay flat or even decline could spur investor confidence. According to Gao, acquisitions have made up a higher proportion of startup exits recently because IPOs have been limited.

“Those large IPOs are the ones that are going to move the needle in terms of fund returns and in terms of really providing that liquidity,” Gao said. “These acquisitions definitely don’t move the needle in terms of fund returns.”

Staying power is also top of mind for tech leaders, especially as buzzwords of past years, like “Web3,” have faded. “Generative AI” flooded press releases in 2023, and although the descriptor of “generative” might fade, according to Porter, AI is here to stay.

“Web3 and blockchain technology in general was super interesting and innovative, but we just struggled with what were the practical, real-world use cases,” Porter said. “AI and its use cases across business and across consumers is extremely durable.”