Startup funding dropped massively in 2023, but AI and climate tech are still winners

Carbon startup Loam's co-founders Tegan Nock and Guy Hudson, who say Orange has been the perfect place to launch the business. Source: Rachael Lenehan Photography

KPMG has just released data revealing that Australian startup funding fell dramatically in the first half of 2023. But it’s not all bad news, with investment into climate tech and AI startups remaining hot.

According to KMPG’s Q2 Venture Pulse Report for 2023, investment fell to US$1.1 billion, compared to US$3.64 billion for the same period in 2022.

And this isn’t surprising. We have seen this ourselves during the sluggish period, which has seen smaller raises on average despite a few larger outliers.

Cut Through Ventures’ latest quarterly report also reflected this, its data clocking $1.5 billion in revenue for the first half of 2023. According to Cut Through, this is just one third of the funding banked during that period in 2022, and the slowest start to the year since 2019.

From a global perspective, KPMG’s data says that VC funding fell from US $86.2 billion across 10,121 deals in Q1 of 2023 to US$77.4 billion across 7783 deals in Q2.

Some familiar factors have been attributed to the drop, including inflation, interest rate rises, the war in Ukraine and instability in the global banking system.

“Across the board, we’re seeing heightened levels of caution and a slower pace of deals, as due diligence and defensibility come to the fore. There is still capital to be deployed, but founders should expect an even more rigorous process with investors to secure investment,” Amanda Price, head of high growth ventures at KPMG Australia, said.

There’s still funding to be had, especially for AI and cleantech businesses

While investments across the board may be down, we have seen some big deals during the time period such as Loam Bio ($105 million), Till Payments ($70 million) and Q-CTRL ($39 million).

And since July 1 brought us into a new quarter, things have also been looking up with Pet Circle ($75 million), Secure Code Warrior ($72 million) and Silicon Quantum Computing ($50 million).

KMPG has reported that investment into AI and cleantech companies have held strong, despite the overall downturn. And this isn’t surprising considering the buzz around AI since OpenAI dropped the immensely popular ChatGPT in November.

Since then we have seen most big tech companies get on board, including Google, Microsoft and AWS. The likes of Adobe, Canva, Slack, Salesforce and many more have also joined the AI party.

On the startup side, this has resulted in extra cash for Australian AI startups such as Fivecast and Eyetelligence.

Cleantech is also getting attention due to increased concerns over the climate crisis, as well as rising energy costs. Internationally this has resulted in some big deals, such as US$232 million for climate tech startup 1Komma5 and US$165 for EV charger company, Jolt Energy.

And here in Australia, we had the aforementioned $105 million for Loam Bio’s microbial seed coating that will help cropping soil trap more carbon. This trend is likely to continue, with the CSIRO’s Main Sequence announcing a new $450 million fund this week, which will focus on clean and deep tech funding.

“Key sectors of interest, including AI and Climatetech, have remained resilient – showing there is still a healthy appetite amongst investors for Australian startups tackling the planet’s most pressing issues,” Price said.

“For AI in particular, we are seeing VCs increasingly looking for startups that have integrated AI into their existing processes to improve efficiency, in addition to seeking to invest in AI-specific startups.”

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