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Founder Fridays No. 60
Helping startup founders and operators scale smarter.
This week I’ve pulled together a bunch of data on Q3 startup fundraising. I know from working with early stage startups every day that the funding environment is really bleak out there. A record number of startups are failing. But the Q3 data suggests that we may finally have hit bottom. See more details below.
Did a savvy operator share this with you?
State of Startup Funding | Q3 2023
Every quarter AngelList comes out with an amazing report on the state of startup funding. The main takeaway is that 2Q23 may have been the bottom of the market. After bottoming out last quarter, early-stage venture performance showed glimmers of a recovery in 3Q23. This was by no means a good quarter, however, this quarter’s performance is undoubtedly a positive development for the startup ecosystem. The whole report is worth a read, below are some interesting data + charts. AngelList (11 minutes)
8.0% of active startups on AngelList raised a round or exited in 3Q23, representing a 2.75% increase over last quarter’s all-time low of 5.25%. While an increase was likely after an all-time bad quarter, it’s heartening to see investment activity return to a level closer to historically “normal” rates of activity in such a short period of time.
64% of deals were raised at higher valuation than the last round. That’s up slightly from last quarter, but far below 2021 rates.
Deals by Sector
Nearly a quarter of all deals and one fifth of all capital invested through AngelList in 3Q23 went to startups building in AI / ML.
Deals by Instrument
A whopping 64% of investments on AngelList utilized SAFEs in 3Q23, and more than half of all capital deployed (50.8%) came from these SAFE deals. This represents the highest mark ever observed for SAFEs. Meanwhile, the share of equity deals on AngelList declined by 2.6% in 3Q23 over the previous quarter, and the share of capital deployed via equity deals declined by 5.1%.
Deals by Round
Record Number of Startups Fail
You know the adage that 90% of startups fail in their first three years of existence? According to a startup genome report from 2019, that figure is actually a bit higher, 11 out of 12 startups fail (which is 91.6%). Carta reports that 212 startups (on their platform) dissolved or filed bankruptcy in Quarter 3 of 2023. This is the highest number of startup failures on record. About half of the companies that closed had not raised any venture capital, relying solely on bootstrapping, angel investors or other sources. For those that did tap venture capitals (VCs), 90% were either Seed or Series A stage companies. Fewer established Series B+ startups shuttered operations, though the 34 later-stage shutdowns exceeded last year’s 25. In raw numbers, 87 startups that raised at least $10 million ended up closing down. That’s nearly double the total in 2022, evidencing the spree of overfunded startups now running out of runway. VC Cafe (5 minutes)
Death By LLM
When Stack Overflow’s traffic apparently went into rapid decline this year, Elon Musk reacted on X with an epitaph: “Death by LLM.” (LLM stands for “large language model.”) His message initially sent a shockwave across the business world as it underlined the imminent threat that generative artificial intelligence (AI) poses across a wide swathe of sectors — from accountancy and legal to media and software — but are all these companies really hurtling toward oblivion? Have firms like Stack Overflow done enough to survive? To some extent, Elon was right. It’s hard to predict what will happen to Stack Overflow. I don’t think it will go out of business. But whether coders go there or to other AI models for answers, it does mean they will be much more efficient — a team of, say, six coders may be able to do the work of 10. Currently, generative AI still has limitations. Musk’s provocative warning may have been overstated — and typically “Elon” — but his signal to enterprise was clear: Create an AI roadmap now, not tomorrow. Big Think (7 minutes)
Founder FAQ: When should I incorporate my startup?
Here are four events that may trigger you to incorporate your startup: (1) When you create intellectual property. By default, the person who creates intellectual property owns the rights to it. Therefore, if intellectual property is created by an individual before the company is formed, that individual owns it until it is transferred to the company. (2) When you have co-founders. Incorporating your startup is essential when there is more than one founder, as it protects your personal assets. Without incorporation, the law considers you a partnership, and you and your co-founder become personally liable for any legal issues or debts incurred by the company. This puts your personal assets, such as your home or car, at risk in the event of a lawsuit or bankruptcy. (3) When you launch. When your product goes live, it’s important to consider that for every user who may benefit from the product, there’s also a user that could have issues resulting in legal violations or litigation. If you haven’t incorporated, then those problems very quickly become your personal problems. (4) When you build your team. Incorporating your startup can also make it easier to attract talent. It creates a more-structured setup that helps potential employees understand the ownership and governance of the company. Westaway (5 minutes)
Startup Funding Guides
I’ve put together a series of guides to equip founders to excel at fundraising. These guides break down the deal term by term and give you negotiation tips so that you can speak to investors with confidence.
Move Fast. Don’t Break Things.
Hi! I’m Kyle. This newsletter is my passion project. When I’m not writing, I run a law firm that helps startups move fast without breaking things. Most founders want a trusted legal partner, but they hate surprise legal bills. At Westaway, we take care of your startup’s legal needs for a flat, monthly fee so you can control your costs and focus on scaling your business. If you’re interested, let’s jump on a call to see if you’re a good fit for the firm. Click here to schedule a 1-on-1 call with me.