Some entrepreneurs were optimistic that 2023 would bring relief after the challenging year of 2022.
While the realm of venture-backed businesses did see some degree of stabilization during the year, it was not devoid of significant events, notable failures, and considerable buzz.
The year 2023 unfolded with a myriad of developments, but it is essential to maintain a forward-looking perspective. From the impact of the cryptovirus to the upheaval in the banking sector that shook the business landscape, including a protracted saga of CEO dismissals reminiscent of a soap opera.
Spread of Cryptovirus
As the year commenced, many individuals grappled with understanding one of the most monumental business collapses in history, involving the cryptocurrency exchange FTX. The founder of the company, Sam Bankman-Fried, found himself facing legal charges linked to the downfall of the once highly esteemed business, including allegations of fraudulent activities.
A consortium of prominent names in venture capital such as Sequoia Capital, NEA, Lightspeed Venture Partners, Insight Partners, Temasek, SoftBank Vision Fund, Thoma Bravo, SoftBank Vision Fund 2, and Coinbase Ventures threw their support behind the U.S.-based exchange FTX, which held valuations of \(32 billion and \)8 billion at different junctures.
Despite the turmoil in the crypto sector leading to numerous businesses declaring insolvency and implementing austerity measures, cryptocurrency prices exhibited a gradual uptrend throughout the year.
However, the enthusiasm among venture capitalists waned, resulting in a significant decline in funding for Web3 and cryptocurrencies.
In a climactic turn of events in November, Sam Bankman-Fried, also known as SBF, was convicted on all seven charges brought against him, including two counts of fraud and five counts of criminal misconduct. The disgraced entrepreneur was found guilty of embezzling approximately $8 billion from users of his cryptocurrency platform by a Manhattan jury, which deliberated for a little over four hours. While the cumulative penalties for the seven charges could amount to a 115-year prison term, legal experts suggest that Bankman-Fried, slated for sentencing in March 2024, is unlikely to serve the entire duration.
AI Emerges as a Lucrative Sector
In the early months of 2022, companies such as Stability AI, a visual arts startup in London, the AI-powered video and audio editing tool Descript, and Jasper, an AI content platform based in Austin, Texas, made significant strides, laying the groundwork for the subsequent AI frenzy.
The news of Microsoft injecting a reported $10 billion into the AI powerhouse OpenAI, the entity behind cutting-edge AI tools like ChatGPT and DALL-E, marked a pivotal moment in the AI landscape.
This initial investment was just the tip of the iceberg, as numerous AI enterprises secured substantial funding or at least claimed to leverage AI technology. Some notable funding rounds included:
- Inflection AI, headquartered in Palo Alto, California, closed a \(1.3 billion funding round in June, led by Microsoft, Reid Hoffman, Bill Gates, Eric Schmidt, and new investor Nvidia. At the time, Forbes estimated the company’s valuation at \)4 billion. Inflection AI specializes in large language models that facilitate interactions with Pi, its AI-driven assistant, positioning it as the “preeminent AI ensemble globally.”
- In September, Amazon and San Francisco-based Anthropic struck a deal wherein the e-commerce and cloud giant committed up to \(4 billion to the AI startup. This investment granted Amazon a minority stake in Anthropic, with an initial infusion of \)1.25 billion, and the potential for an additional $2.75 billion in subsequent funding rounds.
- In November, Aleph Alpha, a German firm, secured $500 million in Series B funding, underscoring the growing prominence of AI companies outside the United States. The financing round was spearheaded by Innovation Park Artificial Intelligence, Bosch Ventures, and the Schwarz Group entities. Aleph Alpha, established in 2019, specializes in enabling businesses to harness extensive bidirectional language models.
The surge of corporate venture capital into the AI domain was evident, with industry behemoths like Microsoft, Google, Zoom Ventures, Nvidia, Oracle, and Salesforce Venture1 actively participating in funding initiatives. As wealth poured into the AI sector, drama ensued, a narrative that will unfold later.
Unforeseen Crisis Unfolds
The business landscape encountered a sudden upheaval, underscoring the limitations of even advanced AI predictive capabilities.
On March 9, Silicon Valley Bank, a renowned corporate lender, announced a stock offering valued at $2.25 billion to fortify its financial position. This institution had extensive ties with over half of all venture-backed enterprises in the United States, as well as numerous venture capital entities.
The announcement sent shockwaves through the business community, prompting concerns regarding the bank’s liquidity and financial stability, despite reassurances from the bank’s management.
Amid apprehensions about accessing funds held by Silicon Valley Bank, several customers, including numerous startups reliant on these funds for future payroll obligations, sought to withdraw their deposits from the ailing institution. The ripple effects were felt swiftly, with Parker Conrad’s workforce management startup Rippling compelled to raise $500 million within hours to meet its payroll commitments.
This chain of events culminated in a halt to transactions and the demise of Silicon Valley Bank, a pivotal financial institution for VC-backed startups over the past four decades, servicing tech companies like Cisco Systems and Bay Networks. The bank’s decline was attributed to a confluence of factors, including the economic downturn, rising interest rates, diminished startup funding, and ill-advised investments in long-term, high-yield bonds that eroded its liquidity.
Following Silicon Valley Bank’s collapse, First Citizens BancShares agreed to acquire the loans and deposits of the defunct institution, as confirmed by the Federal Deposit Insurance Corp. This abrupt exit of a crucial player in the venture capital ecosystem, renowned for its extensive venture lending activities, marked a significant turning point.
A statement from the Federal Reserve Board characterized the bank’s board and management’s delayed response to risk mitigation measures as a classic case of mismanagement, leading to the institution’s downfall.
Subsequently, First Republic Bank, a growing player in the technology banking sector, also faced insolvency and was swiftly acquired by JPMorgan Chase following regulators’ report on Silicon Valley Bank’s collapse. These back-to-back collapses of First Republic Bank and Silicon Valley Bank, the second and third largest bank failures in U.S. history, are poised to reshape the landscape of startup banking, prompting businesses to diversify their financial holdings and seek alternative sources of opportunity debt in a subdued venture market.
Tech Sector Retrenches
The economic downturn reverberated beyond the banking sector, impacting tech companies of all sizes, which resorted to workforce reductions as revenues dwindled.
According to Crunchbase News’ Tech Layoffs Tracker, approximately 190,000 employees at U.S.-based software firms or tech enterprises with a substantial U.S. workforce were laid off in significant workforce reductions since the beginning of the year.
These layoffs, spanning from prominent publicly traded entities like Alphabet, Oracle, Splunk, Qualcomm, and Coinbase to startups such as Navan, Pendo, Reddit, and numerous smaller ventures, underscored the pervasive nature of the economic downturn.
The downsizing trend, exacerbated by the diminished investment activity of VC and growth-equity giants like Andreessen Horowitz, SoftBank, and Tiger Global, led to the closure of high-profile companies like Convoy and D2iQ.
The wave of shutdowns and job cuts may persist into the upcoming year, with many businesses facing the prospect of losing the substantial funding raised during the peak years of 2021 and 2022. Shifting priorities from growth to profitability, coupled with advancements in AI technology, could potentially precipitate further layoffs in 2024.
Expansion Opportunities Emerge
Nevertheless, amidst the challenges, there were glimpses of positive economic indicators within the business landscape.
After nearly a two-year hiatus, the technology IPO market witnessed a resurgence in August, with Finger Holdings, Instacart, and Klaviyo’s advertising automation platform leading the charge.
Investors are optimistic that these IPOs, along with potential future offerings, could inject vitality into the market, generating returns for VCs and fostering a robust venture ecosystem. The success of IPOs and M&A transactions is pivotal for VCs to realize profitable exits, enabling them to reinvest in subsequent funds at potentially higher yields.
While the extent of this resurgence translating into sustained IPO activity in 2024 remains uncertain, there is a prevailing sense of optimism that companies like Stripe may seize the opportunity presented by the thawing market to empower their employees and drive growth.
Altman’s Appointment Sparks Controversy
In a year marked by tumultuous events, the AI industry witnessed its share of drama, notably surrounding the leadership transition at OpenAI.
On November 17, news broke that Sam Altman, an AI luminary, had been appointed as the CEO of the organization. Altman’s appointment followed a board-led evaluation process that concluded he had not been consistently transparent in his communications, impeding the board’s oversight responsibilities. Consequently, the board expressed doubts about his ability to effectively lead OpenAI.
The announcement sent shockwaves through the tech and business sectors, dominating headlines and fueling speculation for days.
A vast majority of OpenAI employees penned a letter to the board, threatening to resign unless Altman and former President Greg Brockman were reinstated, prolonging the saga of Altman’s controversial ousting.
In a surprising turn of events, Altman and Brockman agreed to join a new AI research initiative at Microsoft, the primary benefactor of OpenAI, in the interim.
Five days later, the saga concluded as Altman assumed the CEO role, and OpenAI embarked on a restructuring of its board.
The circumstances surrounding Altman’s dismissal remain shrouded in mystery, with Microsoft CEO Satya Nadella asserting in interviews that there were no glaring transgressions leading to the termination.
As the narrative unfolds in the forthcoming year, one can anticipate a blend of jubilation, intrigue, turmoil, and melancholy characteristic of the dynamic venture landscape.
