The venture capital industry has seen immense highs and lows over the past few years. Record amounts of capital poured into startups in 2020 and 2021, propelling company valuations and deal sizes to unprecedented levels. However, 2022 marked a dramatic shift, with deal activity slowing significantly amid rising interest rates, market volatility, and dampened exit opportunities.
As we head into 2024, what can we expect from the VC landscape? In this comprehensive post, I will provide an in-depth analysis and forecast of the key trends, risks, and opportunities that lie ahead for US startup investing over the next 12 months. I will explore the future dynamics around fundraising, valuations, exit environments, sector trends, geographic activity, and more.
Whether you are a founder seeking capital, an investor allocating to a VC, or simply an observer of the startup ecosystem, I hope this blog provides valuable perspective on where the asset class may be headed after a tumultuous couple of years. Let’s dive in!
Fundraising Outlook: Cautious Optimism After a Slow 2023
The amount of capital raised by VC funds provides a telling look into investor appetite for startup investing. 2021 marked a high point, with VCs securing over $130 billion in fresh capital commitments from limited partners (LPs) such as pensions, endowments, and family offices. However, fundraising dropped off considerably in 2022 and has continued to decline in 2023 amid liquidity challenges and poor interim fund performance.
According to PitchBook, only $84 billion in new VC commitments closed through November 2023, which puts the year on pace for the lowest annual total since 2017. LPs have become more selective and conservative, given depressed public market valuations and limited exit opportunities to return cash from startup investments. Many general partners (GPs) have had to lower target fund sizes or extend fundraising timelines as a result.
However, there are some promising signs that 2024 could see a slight rebound in VC fundraising from the lows of 2023. It is estimated that new capital commitments made over the next quarters ending in Q3 2024 will land around $64 billion, comparable to 2020’s total.
While hardly a dramatic recovery, these projections indicate cautious optimism that the fundraising environment will stabilize rather than deteriorate further. Much depends on the state of public market valuations and technology IPO activity. If exits remain limited, fundraising will likely stay constrained as LPs keep VC allocations conservative. But if liquidity opens up to some degree in 2024, recycled distributions could spur LPs to invest more in new VC vintages.
Established, top-tier VC firms will continue to consolidate LP commitments, while emerging managers may find it difficult to raise new funds. Overall, the supply-demand imbalance between investors and founders will remain for the foreseeable future. Expect fundraising dynamics to improve only moderately in 2024 as the industry continues its post-boom hangover.
The Return of IPOs? Positive Signs, But Expect a Slow Build
For the VC industry, startup IPOs represent the proverbial pot of gold at the end of the rainbow. Not only do they provide sought-after liquidity events to return cash to LPs, but strong aftermarket performance can help elevate a firm’s reputation and fundraising abilities. 2021 was a standout year on both fronts, with major offerings from the likes of Roblox, Couchbase, Toast, and Warby Parker.
However, 2022 represented an almost complete reversal. Economic volatility, corrections in growth stock multiples, and skittish investor sentiment combined to shut the IPO window almost entirely. High-profile companies like Instacart and Reddit pushed out their planned listings, while only 44 VC-backed companies managed to go public all year, according to PitchBook. Valuation step-downs became commonplace in the dearth of exits.
But emerging data suggests that 2024 could finally see a startup IPO comeback. As of Q3 2023, GDP and inflation data are signaling a softer economic landing than feared, buoying risk assets like equities. The Fed also appears to be nearing the end of its rate-hike cycle, with markets now pricing in potential cuts later in 2024. Stable or declining rates would ease pressure on growth multiples and reopen investors’ appetites beyond traditional fixed income.
Volatility has steadily declined over 2023 as well, with the VIX index falling from peak levels. Lower volatility signals greater predictability in public market performance, encouraging IPO candidates to hit the go button. Supply chain issues have largely normalized, giving product and logistics-reliant startups confidence they can meet public demand.
With these constructive backdrop shifts, PitchBook anticipates the 2024 IPO value bouncing back sharply from 2023’s dismal activity. However, a full-fledged IPO boom is unlikely given lingering uncertainties around growth and inflation. Their modeling forecasts around $200 billion in VC-backed IPO value for 2024, above the ~$150 billion seen even in the healthy markets of 2017–2019.
This middling scenario would still represent immense progress and begin clearing the massive backlog of late-stage private startups. However, it will take several quarters of stability for companies and investors alike to regain confidence after the shocks of 2022. Don’t expect an overnight reversion to the go-go markets of 2020 and early 2021. The IPO window will open slowly and selectively until momentum builds over time.
Valuations: Down Rounds to Persist amid Lasting Reset
Easy capital conditions and fierce competition propelled startup valuations into the stratosphere in 2020-2021. Valuation step-ups became widely expected by founders on each new funding round. However, the subsequent tightening of financial conditions and weak public market comps ushered in a dramatic repricing across all stages of a venture.
The median seed deal valuation fell by 34% from 2021 to 2022. The drop at the late stage was even more drastic, with median Series D+ valuations plunging from $350 million to $150 million over the same short timeframe. High-flier startups like Stripe and Instacart took down rounds at substantial discounts to prior marks.
This ongoing valuation reset will continue through 2024 as the industry normalizes from pandemic-era excesses. With inflation still elevated, interest rates unlikely to drop meaningfully, and public comps still depressed, founders will have limited leverage to demand higher prices. Convertible note issuances and inside rounds will remain prevalent as existing investors support portfolio companies through challenging times.
Certain pockets like AI/ML may see stronger valuation resilience given technical breakthroughs and intense competition for opportunities. However, down rounds and flattened valuations will persist as the norm, especially in consumer internet and other sectors lacking differentiation. Even if IPO markets recover, newly public stocks are unlikely to pop dramatically and recapture pandemic premiums.
Overall, private market valuations may decline another 10-15% on average throughout 2024 as the reset runs its course. Companies will need to demonstrate real traction and reasonable paths to profitability to defend pricing. The $100 million+ valuations off the back of an idea and slick deck are decidedly over. Founders must adjust to an environment where raising at flat valuations is often considered a win.
Nontraditional Investors: A 2024 Rebound from the Rate-Induced Retreat
As expansive liquidity and unicorn creation opened up late-stage ventures to wider capital pools, nontraditional investors such as hedge funds, mutual funds, PE firms, and corporates flooded startup investing from 2020 to early 2022. The unprecedented access to capital supercharged valuations and deal activity.
However, these types of crossover investors quickly retreated as the Federal Reserve began aggressively hiking interest rates from near-zero levels. Higher guaranteed yields from fixed income reduced the appeal for allocating to high-risk, illiquid ventures. There has been a significant decrease of 41% in the number of nontraditional investors participating in US startup deals from 2021 to 2023 YTD. This decline has also been observed in corporate venture capitalists.
However, data points to a potential bounce-back in engagement from this critical startup funding segment in 2024. Markets now expect the Fed to halt further rate increases, and potential cuts could arrive in 2024. Declining rates lower the opportunity cost of non-traditional capital, driving renewed asset allocation interest into ventures.
Additionally, lower rates would exert upward pressure on public valuations, causing a denominator effect for crossover fund portfolios. If public assets rally while private holdings remain depressed, nontraditional investors may pursue startup investing to rebalance exposures. Corporations will seek financial and strategic value in discounted venture-stage innovation.
Overall, a stable or declining rate environment in 2024 should attract significantly more non-traditional participation after two years of venture investment pullbacks. Deal activity will benefit from this incremental capital supply, especially for late-stage rounds. Expect crossover investor participation to approach 2021 levels by the end of 2024 if macro conditions evolve positively.
Unicorn Dynamics: Down Rounds and IPOs to Slow Creation
The stellar startup financing environment of 2020-2021 catalyzed enormous unicorn creation, with private company valuations crossing the $1 billion threshold faster than ever before. PitchBook data shows the number of active unicorns in the US swelling from around 300 in 2019 to over 700 by late 2023, while aggregate unicorn valuations reached nearly $2.5 trillion. New unicorns were born at a clip of 2-3 per week at the height of pandemic-era easy money.
However, 2024 looks poised to be a year of unicorn valuation rationalization. Aggregate unicorn valuations have already plateaued over the past six months as down rounds from the likes of Stripe and FTX bring marks back down to earth. But further declines are likely to be forthcoming.
Mature unicorns will face strong pressure to raise capital amid tightening liquidity and depressed results, forcing many to take down rounds after years of inflated financing. In a challenging exit environment, some may also look to preemptively take valuation cuts ahead of eventual IPOs to better align with public market expectations.
Unicorns unable to gain traction or demonstrate credible profitability will struggle mightily to raise at all in 2024’s Darwinian climate. PitchBook forecasts around 30-40 unicorns will shutter operations in 2024. Others will resort to asset sales or distressed M&A to salvage some value. Either outcome will reduce aggregate private valuation totals.
Meanwhile, IPO activity is expected to improve modestly but remain well below prior years’ levels. Many unicorns simply won’t have a public path available in 2024 to “graduate” from unicorn status. With fewer new large convertible rounds, new unicorn christenings will occur far less frequently as well.
It is expected that there will be a 10-15% decrease in active unicorns in the US by 2024, and aggregate valuations could drop by 20%. The downsizing is inevitable after incredible value creation in just a few short years. Investors will have a clearer understanding of where potential risks or challenges may arise, benefiting the industry long-term. But the headwinds in 2024 will be unavoidable for many overcapitalized unicorns.
Late-Stage Deals: Insider Participation to Bridge the Capital Gap
The slowdown in nontraditional investment activity has created a capital supply crunch at the late stage. Crossover investors that liberally funded $100m+ late-stage rounds in recent years have pulled way back. Meanwhile, huge unicorn valuations and limited exits have tied up most mega-VC funds’ capital reserves.
This liquidity pinch has hit rapidly expanding, cash-burning companies particularly hard. PitchBook data shows the late-stage deal count sinking nearly 40% between 2021 and the 2023 annualized rate. Series D and beyond median valuations plummeting from $350 million to $150 million over the same short stretch reflects this capital shortage.
With the late-stage funding landscape still extremely challenged, follow-on inside rounds will play an outsized role in keeping the strongest companies alive in 2024. When external investors balk at providing capital at desired valuations, existing insiders who still believe in the business will step up to bridge the gap. These inside rounds have ticked up to represent nearly 20% of late-stage deals in 2023.
Maintaining valuations or even incremental step-ups in inside rounds helps companies endure until macro conditions improve and outside investor confidence recovers. By supporting top performers, insiders also improve their own portfolio outcomes - a win-win. Without insider participation, many more unicorns would perish or take crippling down rounds.
The reliance on follow-on inside rounds to buoy promising late-stage companies will persist through 2024. Traditional venture funds simply lack the capital to go-it-alone, while non-traditional sources remain conservative. Valuations may creep lower on inside rounds but will provide enough oxygen for worthy companies to stay afloat into brighter days.
Sector Watch: AI Winter Thaws, Fintech & Crypto Remain Chilly
Venture capital sentiment can shift quickly in individual sectors as trends accelerate, stall out, or collapse. Several sectors have faced intensified skepticism entering 2023 after riding incredible enthusiasm in recent years. What lies in store as we look forward to 2024?
Artificial Intelligence: The AI sector soared to incredible heights in 2021 and 2022 amid breakthroughs like DALL-E and ChatGPT. However, the 2023 Softbank implosion and various model limitations heightened fears of an impending “AI winter”. Yet continuous rapid innovations in generative AI into 2024 should reinvigorate enthusiasm and investment. PitchBook anticipates total AI deal value returning to 2022 levels, while valuations hold up better than most sectors given huge TAM potential.
Fintech: After being one of the top-performing startup segments from 2017-2021, consumer fintech demand has slowed alongside e-commerce. Saturated competition, challenging unit economics, and dwindling distribution opportunities have depressed investor appetite. Deal value declined 44% in 2022, per PitchBook. Don’t expect a rebound in 2024 without fundamental industry shifts given margin and retention headwinds.
Crypto: The spectacular crashes in crypto prices, lenders, and exchanges have evaporated investor interest. Deal value in crypto-related ventures sunk 78% between 2021 and the 2023 annualized run-rate, according to PitchBook. Enthusiasm won’t return until the “crypto winter” thaws after contagion clears and pragmatic use cases emerge to justify stratospheric valuations during the boom years. With many crypto leaders discredited, expect deal flow to remain ice-cold through 2024.
Geographic Insights: Globalization Slowdown Means More Domestic Focus
The shift to remote work during the pandemic accelerated the globalization of startup activity, with US investors chasing opportunities abroad and foreign capital reciprocating. 2021 saw all-time highs in cross-border investment, over 50% year-over-year growth in foreign VC deal value invested into US startups, and nearly 2/3rds of the largest US VC mega-rounds, including foreign participation.
However, 2022 brought an inflection as geopolitical tensions surged between the US, China, Russia, and even allies in Europe. National security concerns heightened scrutiny on foreign VC investment while rising logistical costs encouraged localized sourcing and supply chains.
These dynamics will lead to an ongoing pullback in cross-border startup investment in 2024. Foreign participation in US deals will likely remain around 15% below recent highs. US VC investment in foreign startups will see declines as well. The frictionless globalization of prior years has passed its high-water mark.
Expect a greater focus from VC investors on opportunities in domestic and friendly adjacent markets like Canada, UK, and Israel. Startups will increasingly prioritize building operations and inventory within large single countries rather than global distributed models. A more fragmented and localized venture market seems poised to persist over the mid-term as geopolitical uncertainty lingers.
Accelerators and Microfunds: Specializing in Troubled Times
The pre-seed and accelerator market capitalizes on experimentation and low costs to build startup momentum before institutional dollars arrive. This segment has held up better than later stages amid 2022’s turbulence, given the smaller required check sizes. Investors are eager to back the next early-stage breakout that may grow quickly with less capital needs.
Many accelerators also provide invaluable hands-on support and expertise to first-time founders still gaining skills. As the environment gets tougher, this nurturing of top talent becomes even more crucial to startup success. We anticipate seeing accelerators increase activity and deal count in 2024 to identify and develop the highest-potential seed-stage teams. They will play a disproportionate role in tomorrow’s venture winners.
Specialized microfunds focused on specific functions or technologies at the earliest stages will also thrive. These more targeted vehicles are raising third or fourth funds successfully even amid the venture downturn. By concentrating on founders within a domain of expertise, microfunds generate proprietary deal flow and the credibility to lead or participate in winning syndicates.
Conclusion: Cautious Optimism with Ongoing Evolution
In conclusion, 2024 is shaping up to be a year of slow but steady progress for US venture capital after the whipsaw volatility of the prior three years. Key trends to watch include moderate fundraising stabilization, an ongoing valuation reset approaching normalcy, a gradual IPO window reopening, and continued outperformance among focused early-stage investors.
With cautious optimism, it appears we have cleared the bottom, but a return to the unbridled enthusiasm of 2020/2021 remains years rather than months away. The excesses of the pandemic-fueled boom have definitively worked their way out of the startup ecosystem through a mix of prudence and pain.
VC is again embracing its traditional role as a long-term driver of innovation through sensible business models and rational valuations. For all its excitement, the asset class often evolves at a measured pace over decades. While 2024 likely won’t make headlines, the industry should take comfort in this return to normalcy as the groundwork for sustainable success.
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