Mid-Year Review: 2024 US Venture Capital Outlook

Introduction

The US venture capital (VC) landscape in 2024 has experienced significant changes and challenges. As we pass the midyear mark, it’s essential to examine the trends, outcomes, and future predictions that are shaping the industry. This blog post provides a comprehensive overview of the key factors influencing the VC market this year, based on insights from the “2024 US Venture Capital Outlook: Midyear Update” by PitchBook.

Positive Economic Signals and IPO Comeback

Expectations vs. Reality

Entering 2024, there were positive economic signals from the previous year that suggested a potential comeback for Initial Public Offerings (IPOs). The US economy performed better than expected, with a significant GDP increase in Q3 2023. However, the anticipated surge in IPOs has not materialized as expected.

Midyear Update

Despite a few high-profile tech IPOs, the overall number of IPOs remains low. High inflation rates and economic slowdowns in early 2024 have tempered expectations. The NASDAQ 100 and small-cap Russell 2000 Index’s mixed performance reflects the divided market sentiments, further complicating the IPO landscape.

US VC Fundraising: A Mixed Bag

Fundraising Trends

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.

Midyear Update

As of mid-2024, fundraising has reached approximately 30% of 2023’s total. Major VCs like Norwest Venture Partners and Andreessen Horowitz have raised significant funds, but overall fundraising is projected to reach between $58.8 billion and $92.1 billion, depending on economic conditions.

Insider-Led Rounds on the Rise

Rationale

With ongoing capital constraints and market volatility, insider-led rounds have become more prominent. Existing investors have a better understanding of their portfolio companies’ performance and are more willing to support them through additional funding rounds.

Midyear Update

The proportion of insider-led rounds has increased, particularly at the late stages of the venture lifecycle. This trend is expected to continue unless there are significant improvements in capital supply.

The Unicorn Landscape

Predictions

Entering 2024, it was anticipated that the number of active US unicorns and their aggregate post-money valuations would decline. The high valuations from previous years were expected to adjust to more realistic levels.

Midyear Update

Contrary to expectations, the aggregate unicorn valuations and count have continued to rise, largely due to the robust deployment of capital into AI startups. However, the prevalence of flat and down rounds remains high, indicating underlying market pressures.

Nontraditional and Corporate Venture Capital

Nontraditional Investors

The expectation was that flat or declining interest rates would attract nontraditional VC investors back into the market. However, the high-interest-rate environment has kept many of these investors on the sidelines.

Midyear Update

Nontraditional investor participation is on pace for its lowest level since 2019. The current venture market conditions do not justify the risk for many nontraditional investors, leading them to seek shorter-duration asset classes.

Corporate Venture Capital (CVC)

CVC investors have found strategic opportunities in the suppressed valuation environment, particularly in AI-related deals. Their participation has remained stable, focusing on leveraging strategic and financial returns.

The Role of Accelerators and Incubators

Increasing Importance

Accelerators and incubators were expected to play a crucial role in the early-stage venture ecosystem in 2024, helping startups navigate the challenging financing climate.

Midyear Update

Accelerator and incubator participation has remained high, with significant capital invested in early-stage deals. However, notable changes, such as Techstars closing several programs, have impacted local startup ecosystems.

Average Fund Sizes: A Declining Trend

Fund Size Trends

The average VC fund size was predicted to decline in 2024 due to the challenging fundraising environment and the recalibration of target fund sizes by managers.

Midyear Update

The average fund size has fluctuated, influenced by the closing of several large funds by major VCs. However, the overall narrative is one of difficulties in raising funds, especially for emerging managers.

Conclusion

The 2024 US venture capital landscape is characterized by a mix of resilience and challenges. While certain sectors like AI continue to attract significant investments, overall fundraising, IPO activity, and nontraditional investor participation face headwinds. The role of insider-led rounds and the importance of accelerators remain critical in navigating this complex environment. As the year progresses, it will be crucial to monitor these trends and adapt strategies to capitalize on emerging opportunities.

Originally published at Development Corporate.