Venture capital invested into startups in 2023 is expected to fall, but it’s not all bad news, according to the 2023 U.S. Venture Capital Outlook published today by PitchBook Data Inc.

In 2023, PitchBook analysts predict, venture growth deal value will fall below $50 billion thanks to a decline in investment in late-stage and more mature companies. The drop will be driven by a retreat in nontraditional capital that is now retreating from opportunistic venture strategies deployed over the past few years. As a result, many companies will be chasing much lower capital availability.

The researchers explain that also contributing to a downturn is that there may be fewer companies looking to raise late-stage venture capital. Many companies will instead be focusing on sustainable growth and cost-cutting to stay away from the difficult capital-raising market.

With capital declining at the top end of the market, the report also predicts that the Morningstar PitchBook U.S. Unicorn Index will show a negative return through 2023. In 2022 the index returned 1% growth, compared with a 59.1% decline in the IPO Index, but the pace of new unicorn creation has fallen precipitously in recent months. In November, there were fewer than 10 completed rounds with a valuation of $1 billion or more, well below the 48 in January.

C and D rounds are also expected to be hit hard with down rounds, or those implying valuations lower than the previous round, since companies at this stage are currently the most starved for capital. Relative to historical trends, all stages have seen a massive dislocation of deal activity in the fourth quarter, but this was most pronounced at the late stage.

Emphasizing how much the market has shifted, the report finds that 3.5 times more capital was demanded by late-stage companies in the fourth quarter than the deal value observed. Added to the mix is that the late stage was the most overextended during the “VC dealmaking frenzy” of 2020 and 2021.

“As these companies grapple with the new reality of higher interest rates and stricter deal terms, they will not be able to raise at their previous paces, high cash burn rates, or valuation levels,” the report notes.

While the top end of the VC market may suffer in 2023, the good news for those entering the market is that the report predicts seed-stage startup valuations and deal sizes will continue their ascent and reach new annual highs, despite a slowdown in total deal value and count.

The report argues that seed-stage startups are more insulated from public market volatility because they’re in the most nascent stages of the VC lifecycle. Having just raised money, they are further away from an initial public offering and can bide their time until paths to liquidity reopen.

Just how long the path to liquidity will reopen is not known, but it’s unlikely it will be in 2023. The report predicts that special-purpose acquisition company IPOs and mergers will continue to decline.

Elevated market volatility dramatically depressed valuations and halted public listing through 2022, not only iraditional IPOs but SPAC listings as well. Although the report describes the IPO market as nearly frozen, it claims that SPACs will be hit harder because of regulatory scrutiny of the use of SPACs as a way to reach public markets faster than a traditional IPO.

The report predicts that U.S. VC fundraising will fall between $120 million and $130 billion in 2023 as investors grapple with liquidity concerns and consider alternative investments in other asset classes aided by rising interest rates.

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