The 2023 startup and investment report is in the bank, and clear trends are emerging for 2024. This mid-year State of Startup Investing report revisits many of the findings shared in our annual State of Startups(SM) in the Southeast report. In October 2023, we noted a heightened sense of responsibility and careful recalibration of venture capital funding. Follow-on and later-stage deals replaced the 'growth at any cost' mentality of the 2020-2022 era.
Going into Q2 2024, the market is enduring a significant shakeout. Investors ready to deploy capital and founders who meet objective growth metrics stand to do well. Contrary to the (erroneous) long-held belief, current data shows real returns being generated outside the top 20 funds and top 100 venture names.
"If anything is surprising, it's the rate of decline in funding and how quickly markets have adjusted. I can't decide if it's an overshoot, a hangover effect of the looser years of activity, or if there's some other fundamental cause driving it. Relative economic choices will influence the risks people are willing to take, and it will impact capital formation." (Mark Buffington)
Deal counts and dollars invested across the Southeast and Atlanta in 2023 beat expectations slightly. As the region settles back into pre-pandemic patterns, it is showing indications of sustainable growth. Mark Flickinger observed, "Coming on the heels of the venture banking crisis, it was nice to see the startup investing market stabilize and, in many ways, grow. In large part, the predictions made in terms of deal size and dollars deployed held, with the actual data meeting or slightly beating expectations. That's great news for entrepreneurs and investors alike."
In 2023, Healthcare Tech, Consumer Tech, and Fintech captured consistent investor support. Nonetheless, their combined deal counts and invested capital barely matched the investment put toward SaaS startups (many presumably powered by AI). Most of the businesses in the AI sector are early-stage, but private capital is flowing in 2024. "I'm an optimist for AI, but I also believe we're just on the cusp of what we can do with how computers can think and help make decisions," said Buffington. "It's surprising that so many in the market are investing in AI that is unlikely to support building great companies. You see a lemming effect with hype cycles. It happened with bitcoin, big data, social media, and search. They do huge hype cycles, money pours in, and a chunk of that money gets written off."
"There is a lot of excitement with AI, as there should be. However, from an investor's perspective, with overexuberance comes risk. There will be many ways to "win" with AI in the future. Right now, it is difficult to discern which AI companies are actually innovating in the space and which are just using the lexicon to capture the attention of ill-informed customers or investors. Take your time and execute the due diligence to answer that question." (Mark Flickinger)
Signs point to 2024 being an excellent environment for well-equipped private market investors and proven, promising startups. Current VC activity is on pace with 2023 numbers and generally back to pre-pandemic levels. Deal activity is healthy, there's a high level of dry powder, and innovation continues to surge. More innovation companies are opting to stay private longer (or permanently). And even as the IPO market shows signs of thawing, companies are going public at higher valuations than many investors can handle, keeping them looking to the private market for access to the best companies to support.
"As always, I'm interested in tech trends and applications that center on problems and challenges that real people have. That's when the real impact happens." (Mark Buffington)
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