North American Startup Funding Drops to $31.8B in Q2, a Three-Year Low

Q2 Investment Falls to Lowest Level in More Than Three Years

North American startup funding hit a new multi-year low in the second quarter of 2023, with investors committing $31.8 billion to seed- through growth-stage rounds across the U.S. and Canada, according to preliminary Crunchbase data. That sum represents a sharp quarter-over-quarter and year-over-year decline, and is the smallest quarterly total since the first quarter of 2020.

The drop was visible at every funding stage. Late-stage rounds, those from Series C and beyond, saw the most acute contraction, reflecting valuation pressures from public markets and a virtually closed IPO window. Early-stage investment was down only 2% from the prior quarter, at $13.5 billion, while seed and angel funding slipped 13% sequentially to $3 billion. Deal counts also fell to their lowest in two years, though the number of early-stage transactions held up better than total dollar volume.

Despite the overall slide, several outsized rounds punctuated the quarter. Anthropic, an AI safety startup, raised $1.3 billion, and ElevateBio, a biotech platform, brought in a large financing. At seed stage, a $50 million round stood out. On the exit front, restaurant chain Cava staged a successful IPO, and clean energy firm NET Power completed a SPAC merger, each achieving multi-billion-dollar market caps. M&A activity included multiple billion-dollar-plus acquisitions.

Why Late-Stage Deals Are Bearing the Brunt of the Pullback

The late-stage freeze: valuation reset and IPO drought

Late-stage deals are uniquely sensitive to public market comps. With many technology and growth stocks still trading well below their 2021 peaks, the valuations that startups could command two years ago are no longer supportable. Investors are still willing to write cheques for category-defining companies—Anthropic’s billion-dollar round is a case in point—but the bar is much higher. Most private companies raising at this stage must accept flat or down rounds, and many have simply opted to delay fundraising until the exit climate improves.

Early-stage resilience: the pipeline remains intact

Early-stage investment was relatively flat, declining just 2% quarter over quarter to $13.5 billion. That modest pullback, coupled with a healthy number of $100 million-plus rounds, indicates that the venture ecosystem’s pre-seed and Series A pipeline remains active. Seed-stage funding did fall to its lowest level in years at $3 billion, but jumbo seed deals—like the $50 million round mentioned—suggest that top-tier startups are still attracting capital. The longer time horizons of early-stage investors insulates them from near-term IPO market swings, and they continue to place bets on the next wave of companies.

Exits: a few bright spots amid the quiet

The quarter was not red-hot for exits, but it was not a complete freeze, either. Cava’s IPO was a standout, with shares surging and the company reaching a market capitalisation above $8 billion. NET Power’s SPAC merger also drew attention. The M&A market stayed reasonably busy, with several transactions worth hundreds of millions or more. For venture portfolios, these outcomes show that while the exit path remains narrow, it is not shut—companies with real traction and clear business models can still go public or find acquirers at attractive valuations.

Looking to Q3: a low bar and a potential catalyst

With Q2 closing at $31.8 billion, a sequential increase in Q3 would require just $33 billion in deal flow—a target that, given the early-stage momentum and a few large rounds already in the works, appears achievable. The real catalyst would be an IPO market revival. Several large, late-stage companies have been waiting on the sidelines; a reopening of the public market could unlock a wave of pre-IPO financings that have been largely absent for more than a year, potentially pulling overall funding totals higher.

What the Q2 Data Means for VCs, Founders, and the Rest of the Year

• For venture capitalists: The reset in late-stage valuations creates an opportunity to back growth-stage startups at more reasonable prices. Focus on companies that have demonstrated capital efficiency and a realistic path to profitability, even without a near-term IPO. Early-stage funds can continue to deploy capital, but must prepare for longer holding periods until exit markets normalise.
• For startup founders: If you are late-stage, expect flat or down rounds; conserve cash and extend runway. Early-stage founders should still be able to raise, particularly if they target top-tier, brand-name investors who have fresh capital. Be ready to explain how your business can thrive in a higher-interest-rate environment. Seed-stage companies should consider bridging rounds with existing investors if the market remains tight.
• For limited partners: The slowdown means capital call activity is likely to decelerate, but vintages deploying during downturns historically deliver strong returns. Use this period to assess which managers are leaning in and which are staying on the sidelines, as that will be a differentiator in the next cycle.
• Exit watch: The Cava and NET Power exits show that strong consumer and energy transition stories can still find public market demand. M&A may be the most reliable exit path in the near term, so founders and investors should actively cultivate strategic acquirer relationships.