Three years after reaching euphoric highs in 2021, the venture capital market is struggling to regain its footing. Today, The Wall Street Journal reported that venture capitalists (VCs) invested in an estimated 3,925 deals in Q1 2024, down 3% year over year, and well below the 5,466 investments made in Q1 2022.
The Financial Times reported that total capital raised by first-time funds is down from over $40B in 2021 to around $15B in 2023, and even some of Wall Street’s longest-tenured groups are struggling, with Tiger Global only raising $2.2B after initially targeting $6B for its latest fund. Just two years ago, Tiger raised $12.7B for its Fund XV.
So why are VCs struggling to rebound, despite big tech stocks sitting at all-time highs? A few reasons. First, beginning with the Great Financial Crisis, we experienced more than a decade of historically low interest rates, bottoming when the Fed cut rates to almost zero in 2020.
With low interest rates, investors couldn’t get yield from fixed-income investments such as bonds. To generate returns, they had to invest in riskier assets like early-stage startups. With trillions of dollars competing for the same few assets, VCs could easily raise new funds, startup valuations ballooned, and public market demand allowed hundreds of these companies to go public in 2021:
However, with the US federal funds rate now sitting between 5.25 and 5.5%, investors can generate moderate returns from government bonds. When you have a guaranteed 4.5% on a 10 year T-Bill, why would you speculate with a startup that may or may not be worth anything in a few years? Investor capital left venture for other sectors.
For the last decade, startups focused on growth over everything as VCs were willing to continue funding fast-growing, but unprofitable, companies. However, with investor capital slowing, startups had to refocus on profitability, as they could no longer rely on venture capital subsidies. Many startups shut down after failing to make this shift, with financial services platform Carta noting that twice as many well-funded startups on their platform shut down in the first 10 months of 2023 than in all of 2022. Several startups that did survive were forced to raise “down rounds,” or new funding rounds at lower valuations than their previous fundraises.
The entire market is contracting, and it's difficult to see this trend changing without an uptick in private companies successfully going public.
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