Last year was the worst year for venture capital funding since 2016.
So far, 2024 isn’t shaping up to be much better.
Venture firmsraised $30.4 billion from foundations, university endowments and other institutional investors in the first quarter of the year, a decline from 2023, the Financial Times (FT) reported Wednesday (April 3).
The struggle suggests the end of a period of “megafunds” and a slowdown in startup deal-making in the coming years, the report said. Investors have grown more cautious as interest rates have risen, public listings and sales — so-called startup “exits” — have slowed, and returns from venture fund managers have fallen.
“Why has there been such a sustained slowdown? At the core of the issue is exits,”Kaidi Gao, a venture capital analyst atPitchBook, told FT. “Unless we see meaningful improvements from the exit market, we’re expecting fundraising difficulties to linger, and that will put downward pressure on deal-making.”
Fundraising has slowed since 2021, when venture capital groups took in $555 billion, according to the report. Last year, they raised a third of that amount. In the first three months of this year, $9.3 billion was raised in the United States, about one-tenth of the total raised in 2023.
“We want to be there for our partners, but we don’t want to put ourselves in a hole,” said the chief investment officer of a large American foundation, per the report. “It’s tough math for a lot of investors.”
Last month saw reports that startups in Europe were becoming more reliant onconvertible debtas funding dries up.
Convertible debt, which becomes equity over time, can help founders raise money quickly without having to publish new valuations. The volume of convertible debt issued by European VC-backed firms hit a record $2.5 billion last year, up $1.7 billion in 2022.
As to the question of “exits,” PYMNTS wrote last month about the rocky path facing companies amid a ramping up ininitial public offering(IPO) activity.
“There’s demand brewing for deal-making, for startups to be snapped up in the bid to buy rather than build operations, and for FinTech firms, in particular, to go public as they raise capital,” the report said.
“However, as March got underway, of the nearly four dozen FinTechs tracked by PYMNTS Intelligence, only five names have been trading above their offer price,” the report added. “Despite the 55% gain in the FinTech IPO Index recorded for 2023, the absolute returns to date have been, at best, spotty.”
FAQs
Factors that continue to constrain funding activity—and largely affect the entire industry—include slow-to-decline interest rates, lingering inflation, caution and heightened scrutiny from investors, low IPO activity, and residual side effects incurred by startups, namely layoffs and decreased valuations.
What is the downside of VC funding? ›
Disadvantages of VC: Startups may lose equity and control of their company. There can be pressure from VCs to provide high returns, sometimes leading to misaligned interests. The process to secure VC funding can be time-consuming and complex.
Why can big VC firms risk losing money in their deals? ›
VCs are willing to risk investing in such companies because they can earn a massive return on their investments if they are successful. However, VCs have high rates of failure because of the uncertainty involved with new and unproven companies.
What is the failure rate of venture capital funds? ›
Experts from The National Venture Capital Association estimate that 25% to 30% of startups backed by VC funding go on to fail.
Is venture capital on the decline? ›
Venture capital funding rounds decreased in terms of both deal value and volume in the second quarter. Global venture capital deal value amounted to $65.41 billion from April to June, down 8.3% from $71.33 billion during the same period in 2023, according to S&P Global Market Intelligence data.
What percent of VC investments are successful? ›
Successful startup founders have the highest success rates on their VC investments, nearly 30 percent. They are followed by professional VCs at just over 23 percent, and unsuccessful founder-VCs at just over 19 percent.
What happens to VC money if startup fails? ›
The Consequences of a VC Backed Startup Failure
For starters, VCs may lose the money they invested in the failed startup, as well as any fees that were associated with the investment.
Do VC funds beat the market? ›
Half of all venture funds outperform the stock market, which is the benchmark most institutions measure VC funds against. Several articles and research papers have been published on the PME and the comparison of VC versus public stock performance.
Why avoid venture capital? ›
Depending upon how much money you raised, you and your investors might not make any money at all. You might have to exit at a $300 million valuation to get the same financial return. The bottom line is you need to know what you're getting into, good and bad, when you decide to raise venture capital.
What is the biggest risk in venture capital? ›
Market Risks
Even the best idea can fail if there is no market for it. (There's a reason none of us have a WebTV box in our homes these days.) So, it's easy to see why this is one of the most crucial types of risk for VC firms to address before any investment.
Market Conditions: The past few years have seen challenging market conditions, with distribution rates hitting a 14-year low. Market volatility and economic uncertainty have made it difficult for VCs to find suitable exit opportunities, forcing them to hold onto investments longer than planned.
Who is considered the father of venture capital? ›
Georges Doriot, French immigrant, WWII hero, Dean of the Harvard Business School and innovator, is known as “the father of venture capital.” While his firm was based out of Boston, many of his first investments, the investments that made modern venture capitalism a possibility and later a reality, were start-up ...
What is the weakness of venture capitalist? ›
The primary disadvantage of VC is that entrepreneurs give up an ownership stake in their business. Many a time, it may so happen that a company requires additional funding that is higher than the initial estimates.
What is bad about venture capitalist? ›
However, it is important to be aware of the disadvantages that come with venture capitalists. Due to insufficient financial backing, many great ideas fail before they get off the ground. As a result, some startup founders rely on personal savings to run their businesses via bootstrapping.
How risky is making a venture capital investment? ›
Venture capital is a high-risk, high-reward type of investment, and there is no guarantee of success. While VC firms aim to identify the best opportunities and minimize risk, investing in startups and early-stage companies is inherently risky, and there is always the potential for loss of capital.
What is happening with VC funding? ›
Dropping to its lowest level in four years, the 2023 VC market saw a 35% year-over-year decrease from the declining VC investment levels of 2022. Overhang of more than 50,000 existing VC-backed startups continues to impact the investing landscape, which needs to sort out high valuations and low liquidity.
Is venture capital decreasing? ›
Venture capital investment in Q2 2023 declined by 34% from Q1 2023, dropping to $29.4 billion. Our venture capital consulting services can help your business find potential backers and can help venture funds develop portfolios companies. Learn more.
What is the outlook for VC fundraising? ›
US VC fundraising was expected to increase in 2024, surpassing 2023 figures and aligning with 2020 levels. However, the liquidity crunch and sluggish exit rates have pressured fundraising activities. As of mid-2024, fundraising has reached approximately 30% of 2023's total.
Why do corporate venture capital funds fail? ›
Short-Term Focus: CVC funds often fail when they prioritize short-term gains over long-term strategic value creation, missing out on the full potential of their investments. 8. Inadequate Due Diligence: Failing to conduct thorough due diligence on potential investments can lead to poor decisions and suboptimal returns.
