Coinbase is open to leaving the United States in the wake of a regulatory dispute with the government. A tone shift of that magnitude could have an impact on where the future of tech is being built and the opportunity of the global venture market ahead.
The Coinbase news does not exist in a vacuum. Various agencies of the U.S. government are taking a more aggressive posture on cryptocurrencies and digital assets and securities more generally — evidenced by a flurry of recent actions — while concern that developers are heading for the border pick up steam. The U.S. could, in time, shed some of its prominence in the crypto market if trends continue.
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But not so fast: Crypto may be something of an outlier (more on this later), and even then we have to heavily caveat the idea that the United States is in real danger of losing its place as the leading location to build tech companies.
Don’t take our word for it. Instead, we can learn quite a lot from venture capital investments themselves. Given that VCs are expected to be expert investors with a finger on the pulse of what’s next, where they place bets should be a good indicator of where there are hot spots of innovation and optimism.
That said, it’s finicky. What, or really, where there is an opportunity today may freeze up tomorrow, and given the backdrop of an ongoing pandemic, economic tensions and war, some firms are back to their backyards. For example, in Y Combinator’s most recent batch, it cut its India presence in half, while shredding its African startup presence down by 88%. SoftBank’s LatAm fund saw significant losses last year, so much so that partners want you to know that they still exist and are bullish.
But beyond anecdotes, let’s parse through a pile of Q1 2023 global venture data into a single, simple list to make our point. As we consider the U.S. tech scene without Coinbase having its decentralized home in the country, here’s where investors put money to work in the first quarter (Data via Crunchbase, unless specified otherwise):
- Global venture funding came to $76 billion in Q1 2023, down 53% year over year. As Crunchbase points out, without the OpenAI and Stripe deals, “Q1 venture funding would have been down even more dramatically, close to $60 billion.”
- North American funding (which means the United States, really) came to $46.3 billion in the first quarter, again buoyed by the OpenAI and Stripe deals. But even with those stripped out, the regional grouping saw around half of all global fundraising in the first quarter. Overall, funding in the area was off 46%, per the data source. (Disclosure: Alex and Natasha were Crunchbase employees for several years.)
Early stage felt some tensions, too:
- According to a Q1 2023 data survey by PitchBook and NVCA, the U.S. early-stage startup market saw $9.6 billion in deal value across 1,197 deals, a six-quarter consecutive decline. Put differently, deal value in the United States early-stage scene fell below $10 billion for the first time in 11 quarters.
- Globally, early-stage funding hit $25.6 billion in Q1, down 54% year over year, according to Crunchbase. Series B fundraising, perhaps unsurprisingly, took a hit more than Series A rounds.
The United States was able to command the market share of venture dollars this year thanks to even larger declines in other regions:
- In Europe, startups raised $10.6 billion in Q1 2023, off 18% compared to Q4 2022 and 66% off Q1 2022.
- Latin American startups saw an even sharper decline in funding, off 84% compared to year-ago results in the first quarter.
- Venture capital in Asia fell to $15.2 billion in Q1 2023, off more than half from a year-ago tally of $35.5 billion.
As you can see, we saw slumps all over the world. The U.S. isn’t special, and neither are Europe, Latin America and Asia. One potential reason behind the lack of incessant capital may be that more firms are betting earlier, pulling back from late-stage deals given a stagnant exit environment. That means smaller checks, more deals and less big data tallies.
Lux is the latest firm with early-stage roots to ditch a dedicated late-stage fund given that the late-stage and exit environments have remained muted over the past year. Last month, Y Combinator said it would shut down its continuity fund, pulling back from late-stage investing and letting go of 20% of its team in one move.
Other publications and data sources have noted massive declines on a per-country basis. Here’s Reuters:
Startups in India raised just $2 billion in the first quarter of 2023, 75% lower than the same period of last year, and the smallest quarterly number in nearly three years, figures from data firm CB Insights showed. […]
Global factors such as high rates and inflation have weighed on the investment climate in India and elsewhere — startup funding […] in China [declined] 60% to $5.6 billion
Looking at CB Insights’ historical data for the Indian market puts the $2 billion number into context: The country’s venture totals averaged $10 billion per quarter in the back half of 2021. At Q1 2023’s pace, it would take India five quarters to see its local startups raise as much as they did in a single three-month period not that long ago.
China’s venture capital retreat is all the more stark when we consider that there was a time when Chinese startups managed to out raise their American peers back in 2018 for a short period of time. That era is firmly behind us, obviously, but it’s a good reminder that continued U.S. dominance of venture dollars, and therefore quite a lot of tech innovation and its stature as the leading breeding group for future technology giants, is not guaranteed. It has been challenged. Those challenges have sputtered.
Back to crypto. Here are two data points collected by Galaxy:
- Venture capitalists invested $2.4 billion into crypto-focused startups and protocols in the first quarter of 2023, the lowest sum in over two years (since Q4 2020).
- 42% of crypto VC deals completed in Q1 2023 funded companies with headquarters in the U.S. (185 deals). Startups headquartered in the U.K. came in second with 37 deals done in Q1 2023. U.S.-based companies dominated capital raised with 42%, while France was second with 19%.
Even with recent regulatory action, the United States is still by far the leader in crypto fundraising so far this year.
All this is to say that while some crypto founders may head for foreign pastures where the digital grass may be greener, the U.S. is far from losing its crown as the place to build the future.
May competition rage, and other markets build huge, awesome companies. Here’s to a big and prosperous global economy where opportunity is distributed and wins invested back into local communities. But in crass financial terms, the investing class is still pretty much betting that the United States remains the place to build, regardless of what some U.S. companies imply by considering an exit.
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