State of the Global Startup Economy
2023 was a year of conflicting stories for the global startup economy. When inflation eased in most regions and global GDP grew more than expected, many were optimistic that growth would return at the end of 2023 and in early 2024. Instead, the tech winter endured, with exits and funding showing no signs of recovery toward pre-Covid levels.
Yet there are plenty of positive stories as well, particularly for early-stage startups. While global Series A funding fell 46% in 2023 compared to 2022, average Series A deal size increased in H2 2023 compared to H2 2022. Q1 2024 shows signs of further improvement. The Cleantech and Generative AI (GenAI) sub-sectors offer another positive note, demonstrating that frontier innovation can still attract investor enthusiasm regardless of global funding conditions.
Global Startup Ecosystem Faces Challenges Amid Exit Slowdown and Funding Concerns
In a strong global startup economy, large exits ($50 million+) free up financial and human capital that can support newer ventures. Conversely, in a tighter exit environment, capital and talent remain locked in for longer instead of moving on to their next venture. The exit slowdown therefore diminishes ecosystem growth potential as early-stage startups struggle to secure adequate funding and late-stage startups languish, having to decide if they should try to secure another round in the current down funding climate or exit early at a lower valuation.
This has been the landscape for exits since Q1 2022 when stock markets started declining. The annual value of large exits decreased 86% in 2022 compared to 2021, followed by a 47% decrease in 2023 compared to 2022. However, the value of large exits has shown some signs of improvement in Q1 2024.
Two years of underwhelming performance has taken its toll on investors. When a period of weak exit activity is sustained, VCs tend to become more conservative. With less available capital and concerns about future exit viability, investors are more demanding, asking for stronger fundamentals or a clearer path to profitability. This results in startups closing Series A rounds at a later age. In 2019, only 18% of Series A deal startups were between six and nine (6 - 9.9) years old, but by 2023 this increased to 31%. The median age of startups that secured a Series A deal was 3.4 years old in 2019, but moved to 4.2 years old in 2023.
Though the age of startups that obtained Series A deals began skewing older before 2022, this trend has accelerated over the last two years in top global ecosystems. Among the top three 2024 GSER ecosystems – Silicon Valley, New York City, and London – 25% of Series A deals startups were between six and nine years old in 2023, up from just 15% in 2019. This shows that the early-stage VC crunch is being felt in even the best resourced ecosystems.
This is really interesting data which I think reflects three trends. One is companies raising much larger seed rounds, which gives them a long runway before needing to raise Series A. The second is that many VCs are looking only for perfection at Series A, with perhaps unrealistic expectations of companies which are still early. Finally there is a different mindset post-2022 where many founders want to get to 'default alive' earlier in the company's journey.
The Global Startup Ecosystem in 2024: Cautious Optimism Emerges
The dizzying funding heights of 2021 are unlikely to return in the near future; ecosystem stakeholders should adjust their expectations accordingly. However, this does not mean that the global startup economy is stuck in continual decline. Conditions have stabilized and are starting to show signs of improvement, with Series A and exits beginning to go up. Simultaneously, history suggests that VCs that recognize the first-mover advantage of a more bullish approach may reap higher returns compared to those who remain conservative.
Generative AI might lead the way. Acquisitions of AI startups like Run:ai, Manta, and nod.ai by large public companies in late 2023 and early 2024 are positive signals. Additionally, the post-IPO financial success of the AI hardware company Astera Labs has broken a recent streak of underwhelming IPOs of VC-backed startups. While these deals would not be enough on their own to trigger significant global capital availability, they can boost investor sentiment that better days are ahead. One sign of improving conditions is Series A funding amount, which is on track to increase 18% from Q4 2023 to Q1 2024.
Encouragingly, investor sentiment also appears to be improving. An April 2024 Kauffman Foundation survey of 200 firms, two-thirds of which were based in the U.S., found that 53% of respondents planned to increase their number of investments in 2024, while only 6% expect to decrease their deals.
What advice are you giving early-stage founders right now?
First, build solid products before raising and scaling. Focus on getting Product-Market Fit with one specific client. Get the best advisors and angels on board to help design your funding strategy and to help you set up your organization for scaling.
New Unicorns Decline but Show Signs of Recovery in Q1 2024
Unicorns are startups that have achieved a valuation of $1 billion before exiting. In 2023, the number of newly-minted unicorns continued its downward slide from the previous year. 2023 saw 58% fewer new unicorns than 2022, and 87% fewer than the unicorn peak of 2021. However, there was a slight uptick in unicorns in Q1 2024, with 25 new unicorns – the most since Q4 2022.
We also note the changing nature of startup sub-sectors and investor preferences. In 2023, more than half of new unicorns were in the GenAI and Deep Tech sub- sectors, a higher rate than 2021. Deep Tech startups require more capital at earlier stages to develop their products which, combined with the global excitement around GenAI startups, is leading to bigger deals and higher valuations.
The participation of corporate venture capital (CVC) at the early stages also tends to boost startup valuations as it implies the immediate business case applicability of these frontier technologies. While CVC participation in startup funding is up slightly overall, large firms have been involved in some of the highest-profile Deep Tech of the last couple years. Some examples include the French GenAI startup Mistral.ai, which received funding from Microsoft and BNP Paribas, and Eavor, the Calgary- based geothermal Cleantech startup that was backed by BP Ventures and OMV.
As in the past, the U.S. led all countries in new unicorns for 2023, with 57% of the global share. This was up slightly from 2022 when it had a 52% share. Though the total number is down, China nearly doubled its global share of new unicorns, from 6% in 2022 to 11% in 2023. The country attribution of each unicorn is based on where the startup is headquartered.
With 15 unicorns, Silicon Valley again led all ecosystems for the most new unicorns in 2023, though this was down 80% from 2022.
The Tashkent, Lyon, and Rhineland startup ecosystems welcomed their first unicorns in 2023. For Tashkent, this was the Ecommerce platform Uzum; for Lyon, the battery producer Verkor; and in Rhineland, the AI translation service DeepL.
Positive Startup Sub-Sector Stories for 2024
While startup funding was down in 2023, there were several positive sub-sector stories. The Cleantech and GenAI sub-sectors proved resilient, outperforming peer sub-sectors even as they tend to be more capital- intensive than traditional software startups.
Cleantech Sub-Sector Shows Growth Amid Global Funding Challenges
Cleantech startups provide sustainable solutions in the fields of energy, water, transportation, agriculture, and manufacturing. Having experienced a previous peak in 2018, the sub-sector has re-emerged, showing late-stage growth in H2 2023. This is a promising sign given the capital and innovation needed to combat the climate crisis.
While late-stage Cleantech funding has not yet fully recovered to its 2021 peak, it has proven incredibly resilient compared to other sub-sectors, including ones that far outraised Cleantech in absolute funding in recent years. Late-stage Cleantech startups raised 2.5x more funding in H2 2023 than in H1 2020 – a steeper increase than Advanced Manufacturing & Robotics.
Europe Leads Early-Stage Cleantech Funding, Driven by EU Policies and Initiatives
The success of Cleantech is also a regional story. Unlike most other sub-sectors that tend to be dominated by U.S. startups, Europe has taken the lead on early-stage Cleantech funding. When combined, the three most active Cleantech countries of Europe – the U.K., France, and Germany – have overtaken the U.S. and China. These “Euro Leaders” increased their Cleantech Series A funding amount by nearly 50% in 2023 compared to 2021, while China and the U.S. decreased by 40% and 20%, respectively, over this time. Globally, about 15% of Cleantech Series A funding went to startups located in the Euro Leaders, compared to just 4% in both the U.S. and China.
The advancement of European Cleantech startups reflects the EU’s longstanding commitment to driving innovation through policy. For example, the cap- and-trade Emissions Trading System, introduced in 2005 – and set to be expanded in 2027 – presents added compliance costs, but also created a market for startups that develop carbon reduction solutions for corporations. The EU’s Horizon program, running from 2021 to 2027, supports Cleantech startups through funding initiatives such as the LIFE program, which has co-financed more than 5,000 projects helping Europe to become greener.
While the U.S. still devotes the most total VC funding to Cleantech startups, its lead has slipped relative to Europe and China. This may reverse in the coming years, however, as funds from the Biden Administration’s Inflation Reduction Act make their way to investment- ready startups. Starting in 2023, the act has allowed startups and small businesses to claim up to $500,000 in R&D tax credits for research-intensive activity including Cleantech. In March 2024, the Biden Administration announced a $6 billion investment into industrial decarbonization for Cleantech companies and startups to develop these technologies.
Numerous other Cleantech policies exist globally, ranging from funding programs like Canada’s Breakthrough Energy Solutions Program, which has funded many successful Cleantech startups such as CarbonCure and BIOME, to regulatory measures such as Singapore’s 2023 Green Economy Regulatory Initiative sandbox.
The proliferation of climate policies is providing special support to the Cleantech sub-sector.
Cleantech startups, finance providers, and forward-thinking corporates globally are looking to the EU for climate innovation policy best practice in themes including circular economy, sustainable finance, and carbon accounting.
GenAI Startups Surge in 2023, Capturing 18% of Global VC Funding
One of the major startup stories of the past year was the surge of GenAI. The data certainly supports this narrative: in 2023, 18% of all VC funding went to GenAI- focused startups. Even as global funding was down, GenAI had its best funding year to date by far.
GenAI VC funding increased 3x in 2023 compared to 2022. Deal counts nearly doubled. While this surge in AI funding was the result of several factors, the release of ChatGPT 3.5 for the general public on November 30, 2022 served as a launch point for the year to come as investors and enthusiasts alike turned their attention to this cutting-edge technology.
Governments Around the World Grapple with GenAI Regulation
As world leaders start to grasp the potential of this new technology, it is becoming an increasing concern for both domestic and global politics. This may place some GenAI startups in a difficult position as these considerations fall beyond the scope of the typical startup business model. The emergence of national strategies for GenAI startups indicates that more governments are grasping the importance of competing in this space
On March 13, 2024, the European Parliament passed the Artificial Intelligence Act (AI Act), the world’s first comprehensive legal framework for AI. The AI Act will soon ban prohibited GenAI activities such as social scoring and the use of real-time biometric data for all EU countries. It will also establish codes of practice and obligations for high-risk systems around risk management, data security, human oversight, and transparency. Non-EU startups will also need to comply with this regulation. Before its passage, European founders expressed concern that the proposed AI Act would slow innovation and place them at a disadvantage compared to U.S. firms. However, it is too early to determine the act’s impact as some of its requirements won’t be finalized for another few years.
The U.S. has not yet implemented comprehensive AI legislation. On October 30, 2023, President Biden announced an executive order containing some guidance for a coordinated federal AI strategy, but most existing legislation has come from individual states.
Meanwhile, China has implemented several specific AI regulations, including the Generative AI Regulation, which came into effect on August 15, 2023. It is now in the process of drafting a more comprehensive AI law. The Chinese government has drafted an advisory version of this future law, which includes a “negative list” of AI products that companies should avoid unless they have explicit government approval. Although China has previously signaled it may crack down on AI technology, some of its recent language has softened in response to public feedback and concern that excessive regulation could limit the economic benefits of the technology.
Other countries have taken a more proactive AI development strategy. For example, Abu Dhabi and Saudi Arabia recently pledged $100 billion and $40 billion, respectively, to invest in AI technology, including startups. These strategies include incentives to attract AI startups to relocate to their countries. Given all the investment, the GenAI space is poised to continue at its recent pace well into 2024 and beyond.
Top Startup Ecosystems' Dominance Declines as Emerging Ecosystems Capture Larger Share of Series A Funding
From Startup Genome’s first GSER in 2012, the dominance of top startup ecosystems has been evident across all metrics. These leading ecosystems consistently held the lion’s share of funding resources, flexing their strengths and attractiveness to investors and entrepreneurs alike.
However, recent years have witnessed a shift in this dynamic. In 2023, the Series A funding amount share for Top 40 Ranked GSER 2024 ecosystems was 65%, down from 79% for these ecosystems in 2019. Comparatively, the share of Series A funding amount for the Top 100 Emerging Ecosystems reached 19% in 2023 vs. 13% in 2019.
This is a very encouraging development, in line with Startup Genome’s mission for all ecosystems to capture their fair share of the new economy. The startup revolution continues to spread, enabling entrepreneurs all over the world in ways not possible just a few years ago.
This context has impacted the rate of returns among startups, causing investments to retreat. Yet, counterintuitively, high interest rates can benefit startups since they concentrate capital and talent into ventures that create value, weeding out the less competitive ventures. In response to rising interest rates, the risk appetites of investors have shrunk dramatically. As traditional VC markets cool and capital becomes increasingly harder to raise, many startups consider crowdfunding, debt, and loans as alternative financing options. Meanwhile, VC investors are holding on to cash reserves to invest in startups after years of low interest rates.
Tech companies have laid off hundreds of thousands of the tech workers they hired in 2021’s boom time in recent months — in March, Crunchbase put the number so far in 2023 at around 135,000 workers in U.S.-based tech companies (or tech companies with a large U.S. workforce). While state governments, especially California’s, are reeling from loss of revenue and face budget deficits after years of surpluses, the spark of these layoffs could create an explosion of startups. There is a new level of availability of top-notch talent with tech know-how and industry expertise looking for new projects.
The Future is Here: Navigating an AI-Driven World
Startup Genome interviewed Daniel to hear more about his experience and the insights laid out in his 2023 book, "Unsupervised: Navigating and Influencing a World Controlled by Powerful New Technologies."
Startup Genome: You've called our current technological era a "cognitive revolution," preferring that term over the more often used "next industrial revolution." Can you elaborate on that distinction?
Daniel: The concept that we are entering a new industrial revolution – Industry 4.0 – is a misnomer. We are instead continuing on a trajectory initiated with the personal desktop computer in 1973. This development marked a significant shift, bringing the power of personal computerization into personal and professional spaces and setting the stage for the exponential growth in technology we've observed over our lifetime. The internet, e-commerce, Blockchain, and now, AI have been the next logical steps in the sequence that started with the PC.
However, we are just now beginning the section of the curve of exponential technological growth where it starts to match our cognitive abilities. As humans, we tend to think of progress as linear, and many of the institutions we have built to manage technological change – conceived during the Industrial Revolution – reflect that linear view. They will be too slow to harness the vast potential of these new technologies and ill-equipped to make informed judgments on how best to regulate them. In the meantime, we will suffer a constant stream of buzzwords, like AI, metaverse, and quantum, that mask what is truly happening underneath the structures, processes, and governance we’ve built over the last two centuries.
Startup Genome: You co-founded the investment firm EdenBase. What were your motivations, and what opportunities did you spot? What problems are you seeking to solve?
Daniel: EdenBase emerged from recognizing the vast uncertainties around the future of technology, coupled with a keen understanding of the ethical implications inherent in who is building tomorrow's innovations. We focus on creating ecosystems of diverse values, views, and perspectives among both our investing partners and the founders we fund, allowing us to spot opportunities and check assumptions through a wide range of perspectives.
Because we never know what new technologies will emerge, and what their true impacts will be, we initially take a binary approach to reduce investing risks. We look at criteria we can answer "yes" or "no" to, such as if they have a solid team, dedicated customers, financial stability, and innovative product offerings. When the answer is "yes" to these questions, they will more likely overcome the short-term fluctuations in the technology hype cycle. We then work with the founders to understand how their products can solve the future problems and address future opportunities these technologies will present. The Partners of EdenBase invest in asking themselves and their founders not just how the industry will change but how the base level structures of law, finance, and education will look by 2035. The companies we invest in thus define what they want to deliver to their customers today while realizing there is an entirely different future coming.
Startup Genome: Do you have a few examples of companies you've funded where you introduced AI/Frontier Tech to their business model?
Daniel: EdenBase makes selective yet strategic investments in companies poised to redefine their sectors. By 2040, Frontier Technologies will be thousands of times more powerful than they are today, and many innovators are trying hard to create new, superior designs. For instance, Amazon's R&D investment is greater than the total GDP of 40 countries.
Looking ahead, EdenBase is currently eyeing investments in banking and travel, signalling a broader vision that transcends industry boundaries to reimagine the future of finance, law, storytelling, and education by 2035. This approach reflects a pivotal transition from an industrial to a cognitive world, inviting startups to envision products and services within a future where computational intelligence redefines what is possible.
Our initial investments are helping companies realize that the future is changing and find where they fit within it. Our first investment helped a 3D asset company in e-commerce expand its market opportunities by integrating more efficient technologies. EdenBase's second venture is into a collaboration tool that addresses the limitations of Data and Large Language Models (LLMs) in teamwork. Both investments aim to solve problems that will challenge future technology on a larger spectrum, creating a new trajectory and mindset for its founders.
Startup Genome: Are you seeing a concentration of AI tech innovation in certain geographies? Are you concerned about what that would mean for the proliferation of Artificial Intelligence?
Daniel: The real value has always emerged from applications developed atop foundational technologies, be it software for PCs or services utilizing internet protocols. Historically, being geographically close to these foundational technologies and tech hubs like Silicon Valley afforded distinct advantages, facilitating faster and better access to these cutting-edge technologies and networks.
Today, however, the landscape has transformed with the advent of cloud computing and widespread internet access, providing faster, better and more equal access to innovate and leverage base technologies such as quantum computing and LLMs from anywhere globally.
This shift notably benefits regions previously marginalized in the tech boom. Where these jurisdictions face fewer existing structures and regulatory and institutional barriers, they can potentially accelerate the adoption and innovation of technologies in more structural areas such as education, health and finance. Geographies and economies that experience fewer restrictions from legacy infrastructure, established mindsets and regulation compared to mature markets benefit from an opportunity for equal technological access without having to address the inertia inherent in traditional structures. Here, the advantage of developing nations is the enablement of faster growth in some key areas without the burden of traditional legislation to slow them down.
For the first time, the playing field is levelling, opening an era in which the next wave of technological breakthroughs could as likely originate from rural India or Africa as from traditional powerhouses like California or London. This heralds a new chapter of global innovation driven by accessibility.
Startup Genome: What’s your perspective on current regulatory frameworks for AI being introduced around the world?
Daniel: The development of regulatory frameworks for emerging technologies in the U.S., U.K., France, Germany, and beyond presents a complex challenge as governments attempt to balance public concerns with the need for innovation; and short term status quo with long term opportunity. The pressure mounts when job losses trigger political uproar, compelling regulators to act judiciously to avoid stifling progress, particularly in places such as the EU, where the economic focus on commodities and physical goods misaligns with the digital future.
Policy-wise, we need fast-moving, intelligent, informed governance frameworks and ethical guidelines to help steer the cognitive revolution in a positive direction. This is not the norm for bureaucracies which have been designed for maintaining stability. Also, regulation must be designed thoughtfully in collaboration with citizens, industry, and academia to avoid stifling innovation, especially as this is now a global competition. Countries and regions that fail to embrace these technologies and create fertile environments for entrepreneurship and experimentation risk being left behind. But we also cannot afford a race to the bottom. International cooperation and shared baseline principles and standards will be essential. However, the world has no forums suitable for this.
By 2040, AI and other frontier technologies will be thousands of times more powerful than they are today. Leading tech companies are investing billions in R&D to push the boundaries of what's possible. At the same time, innovative startups aim to leverage AI, Blockchain, and other technologies to disrupt and automate entire industries and business processes. This is a global race with the highest high stakes. Those who harness these technologies effectively will reap huge productivity gains and shape the trajectory of the 21st-century economy. New superpowers will be born.
Startup Genome: What advice would you give startup founders and corporates trying to navigate the rapidly evolving tech landscape?
Daniel: For founders and corporate leaders, this means radically rethinking your strategies, operating models, and workforce development for an AI-driven future. Don't underestimate the velocity of change or overestimate your ability to adapt. As futurist Roy Amara noted, we overestimate the short-term impact of new technologies and vastly underestimate the long-term effects. Proactively explore how AI and other exponential technologies can be applied to transform your business. Invest now in upskilling and reskilling your talent to work effectively alongside AI. Build "future-ready" organizational cultures of agility and continuous learning.
Developing a diverse set of stakeholders that can foster effective AI solutions is essential for all those invested in ecosystem success. We must all be proactive in designing and collaborating within a diverse ecosystem of various stakeholders and viewpoints. This will inform a thoughtful trajectory that encompasses all needs – even those that cannot yet be anticipated. We must listen to those who see the world differently. The more people we can involve, the better, and in doing so, we will create a future that is inclusive of all people. Whilst I am positive for our future, this is no time for complacency.
An Interview with Daniel Doll-Steinberg
Co-Founder and Partner of EdenBase
We are in the midst of an exponential technological revolution fundamentally transforming every aspect of society, business, and governance as we know it. As a technology entrepreneur, investor, and author, Daniel Doll-Steinberg has seen firsthand how emerging technologies such as artificial intelligence, quantum computing, Blockchain, and metaverse/immersive tech are ushering in a new era that he calls the "cognitive revolution."