The Global Startup Ecosystem Report 2023
The State of the Global Startup Economy
2021 was a benchmark year for tech startups, with widespread global growth. The trend continued through the first quarter of 2022, after which the impacts of global conflict, supply-chain disruptions, the European energy crisis, and rising inflation and interest rates led to uncertainty and unstable markets. However, midway through 2023, inflation is slowing and economic growth appears to be holding up.
A Recession is a Good Time to Invest in Startups
A recession can bring out the gloom in investors — they dwell on sharp declines in portfolios and focus on the dark clouds of high inflation, layoffs, bank failures, and other economic jitters. Yet in spite of all the volatility in this and previous downcycles, markets recover. In fact, much of the recovery is due to entrepreneurs who respond to the downturn, looking for specific solutions. Demonstrating ingenuity and perseverance, they can help drive the market, pulling it out of downward trends.
For more than a decade, near-0% interest rates proved a safe haven for startups with ample VC funding sources. This led to the overvaluation of startups, generating record funding and exit valuations, and a high number of unicorns. The U.S. inflation rate for the first half of 2023 is lower than the previous year’s rates, but a 15-year era of low interest rates and growing valuations came to an abrupt end in 2022. And this is not specific to the U.S. In March 2023, the European Central Bank predicted that inflation would average 5.3% in 2023, 2.9% in 2024, and 2.1% in 2025. Inflation excluding energy and food was predicted to average 4.6% in 2023.
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.
Historical trends further corroborate the idea that economic downturn can be a good thing for new ventures. Startups funded during the Great Recession had slightly higher exit multiples over total money invested than those funded during economic expansions. From 1997 spanning a decade, VC returns for recession-year startup investments were 13% higher than for all but one of the years.
Between 2006 and 2014, the exit amount/Series A deal amount ratio remained around 20, and this includes the recession years of 2008–2009. This indicates that even during downturn years, startups that achieved Series A funding were able to multiply by 20 the value of the Series A amount by the time of exit. Tangible examples of successes born in a recession include Spotify raising a Series A in 2008, Twitter doing the same in 2007, and Flipkart in 2009.
Recessions dry up sources of capital as banks and VC investors are less willing to provide funds, resulting in fewer funding rounds, lower valuations, and a longer period to materialize. Startups are especially vulnerable to economic slowdowns: the flow of capital funding ebbs, companies have to refocus on sustaining growth and cutting back on costs, and the combination of these factors puts increasing pressure on leaders to achieve their aims.
Global Differences in Funding
The outlook for new startups, though, is not so bleak. While late-stage funding dropped sharply in 2022, and inflated late-stage valuations underwent a correction, early-stage funding remained largely stable. VC investors are turning their attention toward providing seed funding as they look for innovation in new startups. Globally, although fewer startups were funded in 2022, they received larger sums. The early-stage deal count decreased more than the deal amount from 2021 to 2022 — there was an 18% decline in the number of early-stage deals, but a 17% decline in deal amount, meaning that the average deal size grew 2% from 2021 to 2022, from $4,400 to $4,500.
However, it’s a different story for North America, which saw a 26% decline in early-stage funding, the steepest drop of any region. Home to a large percentage of mature ecosystems, investors here chose to continue funding established companies rather than take a risk with new startups.
Asia has had smoother sailing. While most regions suffered sharp declines in total early-stage funding amount in 2022, Asia barely saw a ripple. The amount of early-stage funding declined by only 1%. Similarly, its 5% decline in early-stage deal count was minor compared to the 18% global average. The number of Series A deals decreased for all regions except Asia, Europe, and sub-Saharan Africa: in these regions the Series A deal count increased from 2021 to 2022, at rates of 21%, 9%, and 92% respectively.
There was also a significant drop in global exits in 2022. The biggest tech exit of the year was Miami-based MSP Recovery’s $32.6 billion IPO, which pales in comparison to 2021’s biggest exit, which was nearly five times larger (Beijing-based Kuaishou’s $150 billion IPO).
A dramatic decrease in the count of exits over $50 million and their overall amount began in Q4 2021 and continued into the following year to the extent that the figure for Q4 2022 was below pre-COVID levels. Latin America was the hardest hit region, with exits in 2022 valued at only 7% of its 2021 figure. MENA, meanwhile, was the least affected region, having retained 84% of its 2021 value. Exits over $1 billion collapsed to pre-COVID levels for both deal count and amount. The most affected regions in terms of deal count were Europe and North America, the regions with the highest number of exits. The decline in deal amount was steepest in Latin America and Asia, whereas the deal count in MENA rose 3%.
A dramatic decrease in the count of exits over $50 million and their overall amount began in Q4 2021 and continued into the following year to the extent that the figure for Q4 2022 was below pre-COVID levels. Latin America was the hardest hit region, with exits in 2022 valued at only 7% of its 2021 figure. MENA, meanwhile, was the least affected region, having retained 84% of its 2021 value. Exits over $1 billion collapsed to pre-COVID levels for both deal count and amount. The most affected regions in terms of deal count were Europe and North America, the regions with the highest number of exits. The decline in deal amount was steepest in Latin America and Asia, whereas the deal count in MENA rose 3%.
Silicon Valley was no exception. From a monthly peak reached in August 2021, the Silicon Valley Series A deal count began a decline that continued into Q1 2023 (the most recent confirmed numbers at the time of writing). In February 2023, it reached 27% of the August 2021 number, while the Series B+ deal count reached 36%. Silicon Valley’s deal amount contracted by 75% for Series A and 73% for Series B+ in the same period, more than the global (excluding Silicon Valley) average decline of 69% for Series A and 72% for Series B+.
In mid-2023, Silicon Valley is undergoing a rebirth moment with signs of renewal including Atomic Semi bringing semiconductors back to the ecosystem and the constellation of AI startups emerging from the region, in part driven by OpenAI’s recent success. However, Silicon Valley as the cutting-edge frontier has dissipated and diffused across the U.S. and the world, thanks in part to the very success of the technologies that came out of its previous cycle allowing remote work, outsourcing, and automation.
In mid-2023, Silicon Valley is undergoing a rebirth moment with signs of renewal including Atomic Semi bringing semiconductors back to the ecosystem and the constellation of AI startups emerging from the region, in part driven by OpenAI’s recent success. However, Silicon Valley as the cutting-edge frontier has dissipated and diffused across the U.S. and the world, thanks in part to the very success of the technologies that came out of its previous cycle allowing remote work, outsourcing, and automation.
Fewer Unicorns Are Being Produced
2022’s downturn was also evidenced by the dwindling number of unicorns, a global decline of 40% from 2021’s 595 to 359. The largest declines were in Asia and North America (-46% and -45%, respectively). North America’s share of unicorns declined from 58% to 52%, while Europe took up the slack, increasing its share from 14% to 20%. Beijing struggled in 2022. Each year from 2015–2020 it produced 10 or more unicorns; that number shot up to 19 in 2021, but likely due to COVID lockdowns, fell to three in 2022.
A number of ecosystems defied the downward trend, producing more unicorns in 2022 than in the previous year. Included in this group were: Shenzhen +1 (from 6 to 7) and Montreal +1 (from 3 to 4). Zurich and Milan both produced zero unicorns in 2021 but three each in 2022.
What’s more, seven ecosystems produced their first tech unicorn in 2022: three in Europe (Payhawk from Sofia, Rimac from Zagreb, and Rohlik Group from Prague), one in North America (EnergyX from San Juan, Puerto Rico), one in Asia (Open from Kerala), one in MENA (Yassir from Algiers), and one in sub-Saharan Africa (Sun King from Nairobi).
The usual players of Silicon Valley, New York, Beijing, and Shanghai may remain at the top of the rankings, but many smaller ecosystems are making headway. Previously reliant on connections to bigger ecosystems, these smaller players are increasingly becoming globally connected to each other, able to form their own nodes without the connection to the massive hubs.
China Slowing, India Gaining Ground
The GSER 2022 focused on the decline of China’s dominance and unbridled growth of India. This trend broadly continues: Eight Chinese ecosystems have fallen in the rankings from last year, including the leading hubs of Beijing, Shanghai, and Shenzhen, while seven Indian ecosystems moved up, including Delhi and Bengaluru-Karnataka in the top 30 and Mumbai tied at #31.
India recently surpassed China as the world’s most populous country. That fact, coupled with its high percentage of working-age population — currently over 1.4 billion and growing — has created the world's largest talent pool.
Additionally, the Indian government has massively invested in infrastructure and expedited growth and investment-oriented policies and reforms. This has transformed the nation into a major manufacturing and technology hub. The 2023 national budget only seeks to build on this growth, with several inclusions intended to boost entrepreneurial success, such as efforts to improve the ease of doing business through the simplification of the KYC process and the introduction of a unified filing process. The budget also includes tax benefits for eligible startups and plans to set up 30 Skill India International Centres across the nation.
Yet, despite the overall positive story, even India is experiencing a slowdown. In 2021, India minted a record 36 unicorns while raising a total of $72 billion in exits. In 2022, the number of unicorns was down 33% to 24, and exits declined to $5.5 billion.
India recently surpassed China as the world’s most populous country. That fact, coupled with its high percentage of working-age population — currently over 1.4 billion and growing — has created the world's largest talent pool.
Additionally, the Indian government has massively invested in infrastructure and expedited growth and investment-oriented policies and reforms. This has transformed the nation into a major manufacturing and technology hub. The 2023 national budget only seeks to build on this growth, with several inclusions intended to boost entrepreneurial success, such as efforts to improve the ease of doing business through the simplification of the KYC process and the introduction of a unified filing process. The budget also includes tax benefits for eligible startups and plans to set up 30 Skill India International Centres across the nation.
Yet, despite the overall positive story, even India is experiencing a slowdown. In 2021, India minted a record 36 unicorns while raising a total of $72 billion in exits. In 2022, the number of unicorns was down 33% to 24, and exits declined to $5.5 billion.
China has suffered through restrictive policies for extended periods, and its growth is slower than it was prior to the pandemic. In the period 2018–2020, China produced an average of 28 unicorns per year, dwarfing India’s yearly average of seven. In 2021, that gap decreased, though China still produced 21 more unicorns (57) than India (36). In 2022, the combination of China slowing and India’s growth saw the nations close their previously wide gap in unicorn production to just three (27 vs 24).