The year 2023 was marked by contrasting stories for the global startup economy. While inflation eased in most regions and global GDP growth fell below expectations, many were optimistic that growth would return by the end of 2023 and early 2024. Instead, the “tech winter” continued, with exits and fundraising showing no signs of recovering to pre-COVID levels.
However, there were many positive stories, especially for early-stage startups. While global Series A funding dropped by 46% in 2023 compared to 2022, the average size of Series A deals increased in the second half of 2023 compared to the second half of 2022. The first quarter of 2024 showed limited progress. CleanTech and Generative AI (GenAI) sectors, however, are showing other positive signals, demonstrating that pioneering innovation can still attract investor enthusiasm despite global funding conditions.
The global startup ecosystem faces challenges amid a downturn in exits and concerns about fundraising. In a strong global startup economy, large exits (over $50 million) free up financial and human capital, potentially supporting newer ventures. In contrast, in a tighter exit environment, capital and talent will be held back for longer periods rather than moving to the next project.
Therefore, the capital exit downturn reduces the growth potential of ecosystems, as early-stage startups struggle to secure sufficient funding, while later-stage startups stagnate, deciding whether to attempt securing another round of funding in the current declining funding environment or exit early with a lower valuation.
This has been the state of exits since Q1 2022, when the stock market began to decline. The annual value of large exits decreased by 86% in 2022 compared to 2021, followed by a 47% drop in 2023 compared to 2022. However, the value of large exits showed some signs of improvement in Q1 2024.
Two years of underperformance have affected investors. As the exit downturn persists, venture capital (VC) funds tend to become more conservative. With less available capital and concerns about future exits, investors have become more stringent, demanding stronger core factors or a clear path to profitability.
This has caused startups to complete Series A rounds at older ages. In 2019, only 18% of startups in Series A funding rounds were between 6 and 9.9 years old, but by 2023, this figure had increased to 31%. The average age of startups completing a Series A round was 3.4 years in 2019, but it rose to 4.2 years in 2023.
Although the age of startups successfully raising funds in Series A began to rise before 2022, this trend has accelerated in the past two years in the world’s leading ecosystems. Among the top three ecosystems according to the GSER 2024 report — Silicon Valley, New York City, and London — 25% of startups successfully raising Series A funding were between 6 and 9 years old in 2023, up from just 15% in 2019. This indicates a shortage of early-stage VC even in the most well-resourced ecosystems.
Bright Spots in the Global Startup Ecosystem in 2024
It is unlikely that funding will return to the peaks of 2021 in the near future. However, this does not mean the global startup economy is stuck in a continuous recession. The environment is gradually stabilizing and beginning to show signs of improvement, with Series A rounds and exits starting to increase.
Generative AI may be leading the trend. The acquisition of AI startups such as Run:ai, Manta, and Nod.ai by large public companies in late 2023 and early 2024 is a positive sign. Additionally, the financial success post-IPO of AI hardware company Astera Labs has broken the chain of poor IPO performances among VC-backed startups in recent years.
Although these deals will not immediately increase global funding availability, they could boost investor sentiment about brighter days ahead. A sign that the situation is improving is that Series A funding is on track to increase by 18% from Q4 2023 to Q1 2024.
Encouragingly, investor sentiment also seems to be improving. A survey of 200 companies — two-thirds of which are based in the U.S. — conducted by the Kauffman Foundation in April 2024 showed that 53% of respondents planned to increase their investment activity in 2024, while only 6% expected to decrease their deals.
Fewer New Unicorns, but Signs of Recovery in Q1 2024
Unicorns are startups valued at $1 billion before an exit. In 2023, the number of new unicorns continued to decline compared to the previous year. The number of new unicorns in 2023 was 58% lower than in 2022 and 87% lower than the unicorn peak in 2021. However, Q1 2024 saw a slight increase in the number of unicorns, with 25 new unicorns — the highest since Q4 2022.
It is also important to note the changing nature of startup sectors and investor preferences. In 2023, over half of the new unicorns were in the GenAI and Deep Tech sectors, a higher rate than in 2021. Deep Tech startups require more capital in the early stages to develop their products, and this, along with global excitement for GenAI startups, led to larger deals and higher valuations.
Corporate Venture Capital (CVC) involvement in early-stage funding also tends to boost startup valuations as it implies the immediate commercialization potential of these pioneering technologies. Although overall CVC participation in startup funding increased slightly, large companies have been involved in some of the most notable deep-tech startups in recent years. Examples include French GenAI startup Mistral.ai, funded by Microsoft and BNP Paribas, and Calgary-based clean tech geothermal startup Eavor, supported by BP Ventures and OMV.
As before, the U.S. led all countries in the number of new unicorns in 2023, accounting for 57% of the global market share. This figure increased slightly from 52% in 2022. While the overall number decreased, China nearly doubled its share of new unicorns globally, from 6% in 2022 to 11% in 2023.
With 15 new unicorns, Silicon Valley once again led all ecosystems in the number of new unicorns in 2023, although this number was down 80% compared to 2022. Startup ecosystems in Tashkent, Lyon, and Rhineland welcomed their first unicorns in 2023. For Tashkent, it was the e-commerce platform Uzum; for Lyon, it was battery maker Verkor; and for Rhineland, it was AI translation service DeepL.
Positive Startup Sectors
Although funding for startups declined in 2023, there were still positive stories in some sub-sectors. Cleantech and GenAI sectors have shown resilience, outperforming their peers even though they tend to be more capital-intensive than traditional software startups.
Cleantech Sub-Sector Growth Amidst Global Funding Challenges
Cleantech startups bring sustainable solutions in energy, water, transportation, agriculture, and manufacturing. After peaking in 2018, this sub-sector has made a comeback, showing signs of growth in the second half of 2023, promising the capital and innovation needed to combat the climate crisis.
Although late-stage Cleantech funding has not fully recovered to 2021 peak levels, it has demonstrated remarkable resilience compared to other sectors, including those that have raised more capital in recent years. Late-stage Cleantech startups raised 2.5 times more funding in the second half of 2023 compared to the first half of 2020 — a stronger increase than the Advanced Manufacturing & Robotics sector.
Europe Leads Early-Stage Cleantech Funding, Driven by EU Policies and Initiatives
The success of Cleantech is also a story of regions. Unlike most other sectors dominated by U.S. startups, Europe leads in early-stage Cleantech funding. Together, the three most active European countries in the Cleantech sector – the UK, France, and Germany – surpassed the U.S. and China. These “European leaders” increased their Series A funding in Cleantech by nearly 50% in 2023 compared to 2021, while China and the U.S. saw reductions of up to 40% and 20%, respectively, during this period.
Globally, about 15% of Series A Cleantech funding is allocated to startups based in the leading European countries, compared to just 4% in both the U.S. and China.
The progress of European Cleantech startups reflects the EU’s long-term commitment to promoting innovation through policy. For example, the cap-and-trade emissions trading system, introduced in 2005 – and expected to expand in 2027 – adds compliance costs but also creates a market for startups to develop carbon reduction solutions for corporations. The EU’s Horizon program, running from 2021 to 2027, supports Cleantech startups through funding initiatives like the LIFE program, which has co-funded over 5,000 projects to help make Europe greener.
While the U.S. still dedicates the largest share of overall venture capital funding to Cleantech startups, its leadership position has slipped compared to Europe and China. However, this situation may reverse in the coming years as funding from the Biden Administration’s Inflation Reduction Act is directed toward startups ready to invest. Beginning in 2023, this act allowed startups and small businesses to receive up to $500,000 in R&D tax credits for deep research, including Cleantech. In March 2024, the Biden Administration announced a $6 billion investment in industrial carbon removal, aimed at helping Cleantech companies and startups develop these technologies.
Globally, there are various Cleantech policies, from funding programs like Canada’s Breakthrough Energy Solutions Program, which has supported many successful clean tech startups like CarbonCure and BIOME, to regulatory measures like Singapore’s Green Economic Regulations Initiative of 2023, guiding responsible AI development and usage, including GenAI. However, unlike Europe, the U.S. has not passed a comprehensive AI law, opting instead for sector-specific regulations often managed by federal agencies. This allows for faster innovation in U.S. startups but also raises concerns about the lack of a consistent legal framework that could lead to ethical and privacy risks.
In Asia, China continues to assert its ambition to lead in the AI race, with a series of policies and strategies for developing GenAI rolled out from the central to local levels. The government has required large AI models to be licensed before deployment and must comply with strict data security and content censorship regulations. This reflects China’s “control in innovation” approach to high technology.
The global race to develop Cleantech and GenAI is witnessing significant shifts in funding sources, policies, and investment trends. While Europe is emerging as a leader in Cleantech, thanks to long-term, sustainable policy support, GenAI is reshaping the global startup landscape, with the U.S. remaining a central hub but facing mounting regulatory pressure. Other countries and regions, such as China and Singapore, are also rapidly shaping their ecosystems, showing that the global competition is becoming more intense, not just in technology but also in governance and sustainable development models.
The Dominance of Leading Startup Ecosystems Diminishes as Emerging Ecosystems Capture a Larger Share of Series A Funding
Since the first GSER ranking by Startup Genome in 2012, the dominance of leading startup ecosystems has been evident across all metrics. These top ecosystems consistently capture the majority of funding, leveraging their strengths and appeal to investors and entrepreneurs. However, recent years have seen a shift.
In 2023, Series A funding allocated to the top 40 ecosystems in the GSER 2024 ranking was 65%, down from 79% allocated to these ecosystems in 2019. In comparison, Series A funding allocated to the top 100 emerging ecosystems reached 19% in 2023, up from 13% in 2019.
This is a highly encouraging advancement, demonstrating that all ecosystems now have a fair share in the new economy. The startup revolution continues to spread, creating opportunities for entrepreneurs around the world in ways that were not possible just a few years ago.
Source: National Agency for Science and Technology Information and Statistics
