Venture Capital Market Update Going into 2024

Source: PitchBook, Kyle Stanford, Lead Analyst, Venture and Crunchbase

Final data is in, and 2023 was an extremely difficult year for the venture capital industry, broadly speaking.

A slower final quarter ended a lackluster year for global startup funding as venture capital investors continued to hold back in 2023.

Global startup investment in 2023 reached $285 billion — marking a 38% decline year over year, down from the $462 billion invested in 2022.

Cutbacks were deep across all funding stages globally. Early-stage funding in 2023 was down more than 40% year over year, late stage by 37%, and seed just over 30%.

It’s worth keeping some perspective, though: Overall funding in 2023 was down by less than 20% when compared to the pre-pandemic years of 2018 to 2020. The global market declined in almost every phase, and small narrative shifts throughout the year never seemed truly backed by a momentum swing in deals, exits, or fundraising.

In the US, 2023 was a rather slow year for activity. Deal activity for the fourth quarter came in at an estimated 3,934 deals completed, which, though nearly 28% off the high quarter in 2022, remained above any quarter before 2021, except for Q1 2020. It was a slight increase from Q3 as well.

The context of that strength is the important piece of the statement. While deal counts were relatively high, deal value continued its descent from historic levels, with just $170.6 billion invested across the year, a drop of $71.6 billion from 2022 and $177.4 billion from 2021. Even more dramatic is the fall when the nearly $17 billion (10% of the annual deal value) invested into Anthropic and OpenAI is noted out of the total.

The lack of capital availability continued to be highlighted by our demand-to-supply ratio model, which shows a void across all stages through outputs of between 1.4x and 2.0x. The OpenAI and Anthropic deals do count within the annual total despite the uniqueness of the deals, of course, so removing those entirely would be disingenuous, as outlier deals have always pushed deal value trends. But the size of those deals and the energy they harnessed from the AI arms race underscores a major unbalance within the venture market.

Capital availability is extremely low for the market, and $1 out of every $3 invested went into AI companies during the year, which comprised roughly 20% of deals. Near-term relief for the market should not be expected, either. Pitchbook’s company inventory continues to grow, showing that more than 54,000 companies are private and VC-backed in the US. While company shutdowns and bankruptcies may have increased during 2023, more than 4,000 companies raised their first VC investment during the year.

So as investors pulled back from late-stage financing rounds, a bevy of companies continued to enter the venture lifecycle, adding to future pressure. Q4 did provide an increase in early-stage, late-stage, and venture-growth-stage financings over the quarter prior, which helped ease some of the short-term cash needs of individual companies, but, as mentioned, our VC demand-to- supply model still shows a wide gap between needs and available supply.

Public markets in the US finished positively for the year, which signals that the economic pressures on markets may be receding. Inflation has remained on the downward trend, and interest rates could be set for cuts in 2024. Though much of the performance has been delivered by megacap tech companies, the Russell 2000 jumped more than 26% over the final months. Public multiples begin to expand, including for VC-backed companies, which signals that investor interest in small-cap growth stocks may be returning.

A single quarter jump may not predict a true resurgence, but a positive sign is much needed as returns from VC investments have been extremely low over the past two years. Until either price-to- sales multiples expand or companies are amenable to discounted prices upon listing, lingering uncertainties will keep new public listings low. Our VC-backed IPO Index showed a positive performance during the final two months of 2023, but there is a long way for it to go before returning to previous highs.

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