Less funding for deep tech startup: The thrill is gone

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  Quantumrun Foresight
• September 26, 2023

Insight summary

The prospect of a worldwide recession is causing a decline in startup investments. According to a 2023 Crunchbase report, there was a 63 percent decrease in investments for North American startups during the final quarter of 2022, compared to the previous year, following a remarkable 2021. It is anticipated that startups may have to adopt a survival-oriented approach in 2023, which could hinder innovation.

Less funding for deep tech startup context

Venture capitalist (VC) Micah Rosenbloom asserts that during difficult times, investors tend to favor mature startups with proven business models and a likelihood of going public soon. Funding may be less reliable for startups that don't meet these criteria. Although pre-seed and seed rounds may remain active, the prerequisites could become more rigorous, as these companies are not expected to go public for several years.

Another VC, Jon Sakoda, believes the USD $290 billion in committed VC investments could serve as "dry powder" to revitalize startup funding. However, Rosenbloom argues that the situation is more complex. VC firms obtain their investments from sources such as pension and sovereign wealth funds, endowments, and family offices.

These entities, referred to as limited partners (LPs), manage complex portfolios. In the uncertain climate of 2023, these LPs face numerous interconnected challenges to meet their VC obligations. Furthermore, their cash flow relies on the liquidity obtained from prior investments, which determines the amount of VC funding they can allocate.

Although attractive, unrealized gains from markups do not solely dictate future investment allocations; cash returns play a crucial role. The considerable drop in public market valuations also diminishes the expected capital as lockup periods for recent exits close. This pattern requires a reassessment of private holding models, resulting in even lower anticipated revenues.

Disruptive impact

Several industries are expected to be more impacted by the decline in deep tech startup investments, including agriculture technology (agtech). Consultancy firm McKinsey reports that compared to 2012, the capital invested in new agtech ventures increased approximately 20-fold in 2021. However, investment experienced a substantial drop toward the end of 2021, mirroring the broader slowdown in VC funding.

Startups that failed to secure funding since 2020 or those that spent heavily to scale up now find themselves in a volatile fundraising landscape. The reduced availability of later-stage VC and a slowing initial public offering (IPO) market have forced many startups to accept lower valuations in 2022, resulting in investor dilution. Considering the ongoing economic pressures and uncertainties, it is unlikely that the overall market will recover in the short term.

The biotechnology industry is also facing a scarcity of capital. As The Economist points out, the once-celebrated status of biopharma among investors during the pandemic has significantly diminished. The biotechnology sector is particularly vulnerable to slower economic growth, increased inflation, and rising interest rates. The limited investment in smaller biotech companies can be attributed to the recent focus on platform technology with profit-generating potential rather than clinical assets.

Like the technology sector, biotech firms resort to extensive layoffs to cut costs. In 2022, over 100 biopharma companies reduced their workforce, with November witnessing the highest number of layoffs. The only group seemingly weathering the storm is Big Pharma, which has sufficient capital to maintain hiring.

Implications of less funding for deep tech startup

Wider implications of less funding for deep tech startups may include: 

• A decline in innovation as entrepreneurs have limited resources to create new products, services, and technologies.


• Job creation decreasing and layoffs increasing, leading to higher unemployment rates. Professionals looking to transition into the technology industry could find fewer opportunities.


• Technological progress slowing down, making it challenging for businesses to remain competitive in a constantly evolving business environment.


• Fewer companies focusing on environmental solutions and green technology, which could hinder efforts to address climate change issues.


• Diversity within the startup ecosystem decreasing as women and underrepresented groups encounter additional obstacles to securing funding.


• Competitiveness might decrease for countries with a strong focus on startups and entrepreneurship.

Questions to consider

• If you have colleagues who work for a startup, how does the lack of funding affect their company?


• What can startups do to adapt to an unstable economy?