2024 Venture Capital Outlook

The venture capital landscape has witnessed substantial fluctuations in recent years. In 2020 and 2021, startups experienced a record-breaking influx of capital, driving company valuations and deal sizes to unparalleled highs. However, 2022 brought about a notable disruption as deal activity decelerated considerably due to escalating interest rates, market instability, and diminished exit prospects.

This year, modest stabilization in fundraising and a continued shift towards more realistic valuations will shape the venture ecosystem. Further, the IPO market, which has been relatively dormant, is poised for a cautious yet promising revival. However, despite the emergence of prudent optimism as the market shows signs of recovery, elements of uncertainty still linger and will influence how LPs and GPs approach new and existing VC investments.

Additionally, the startup ecosystem, in particular, will continue to recalibrate, addressing and rectifying the excesses that were a hallmark of the pandemic-driven boom, and VC investors will refocus their priorities to favor sound business strategies, efficient growth, and strong business fundamentals.

Gradual Uptick In VC Fundraising Activity

According to PitchBook, as of November 2023, new VC fund commitments amounted to just $84 billion, forecasting 2023 to have the lowest total since 2017. Amid market uncertainty, LPs have adopted a more discerning and cautious approach in response to the downward trend in public market valuations and scarce cash-return opportunities from VC investments due to a stalled exit environment.

The IPO market will likely experience a minor uptick in 2024 due to stabilized inflation, reduced market uncertainty, and the potential for rate cuts. However, the extent of this upturn will hinge on the performance of technology IPOs and public market valuations throughout the year.

While a full-fledged IPO boom is unlikely, the prospect of stable or declining rates is anticipated to ease pressure on growth multiples and reopen investors’ appetites. At a minimum, the Financial Times notes that LPs expecting distributions of any size may pressure funds to sell investments, even if at less ideal valuations.

However, if exit options remain scarce, fundraising will remain limited, with LPs maintaining a cautious approach to new VC commitments. This outcome will ultimately favor well-established, leading firms, with many new managers struggling to raise new funds in this scenario.

Down Rounds Persist as Startups Struggle to Meet Pandemic-Era Valuations

Pre-pandemic easy capital and intense competition drove startup valuations to unprecedented highs. However, tighter financial conditions and weaker public market comparisons have led to a significant reevaluation across all venture stages. According to Carta, the median seed valuation got 5% smaller between Q1 2022 and Q3 2023, while the median Series D valuation fell by 50%.

Since the onset of the downturn, many VC investors have been advising their portfolio companies to extend their financial runways to secure cash for 18 to 36 months, aiming to achieve their pandemic-era valuations and prevent down rounds. However, with valuation multiples falling drastically from their 2021 peaks, many late-stage companies won’t achieve their previous valuations in these timelines, and investors and founders are gradually reconciling with the reality that returning to the lofty valuations of the pandemic era will be a prolonged process.

While some sectors, like AI/ML, may maintain stronger valuations due to generative AI innovation and strong demand, a continued valuation reset could lag into 2024. Most companies will feel the pressure to demonstrate progress toward feasible profitability plans to maintain their valuations.

Funding Pressures and Overcapitalization Loom Large for Unicorns

Unicorns, specifically, will face a significant valuation reckoning as the impact of overpriced rounds, coupled with a cold fundraising environment, reverberates through 2024. Amid tightening liquidity and lackluster growth, many mature companies will confront substantial pressure to secure capital, leading them to opt for down rounds following years of inflated financing.

This trend has already started, with aggregate unicorn valuations plateauing in the last six months following down rounds from major players like Stripe and Ramp. Additionally, in a challenging exit environment, some unicorns may also look to preemptively take valuation cuts ahead of eventual IPOs to better align with public market expectations.

In the current funding landscape, unicorns lacking traction or credible profitability will encounter formidable obstacles in raising funds, and some may even be forced to shutter operations (like the once prominent InVision) or resort to asset sales or distressed M&A to salvage value.

Insider Rounds Will Play an Important Role in Sustaining Late-Stage Companies

The broad availability of liquidity and the rise of unicorns expanded access to late-stage VC for a broader range of capital sources. In the pandemic era, nontraditional investors, including hedge funds, mutual funds, and corporations, surged into late-stage startup investments, significantly boosting valuations and intensifying deal activity.

However, these crossover investors have largely paused their venture strategies over the past year, as the Federal Reserve aggressively raised interest rates and therefore diminished the appeal of high-risk, illiquid ventures — nontraditional late-stage deal count fell by roughly 40% from 2021 to 2023. This decline has contributed to a significant capital shortage of late-stage financing, particularly affecting large, rapidly growing companies.

As a result, follow-on inside rounds will become increasingly important for sustaining strong companies in 2024 and providing interim support until broader market conditions and investor confidence improves. Although valuations in inside rounds may not trend into this year with the same step-ups as years prior, they will still provide essential support for deserving companies to weather the challenging period.

Startups Confront the Balancing Act of Growth and Profit

Valuation and fundraising challenges, coupled with inflation and rising interest rates, have stressed the “growth at all costs” mentality that dominated the last decade of venture. Growth requires significant investment, impacting cash reserves. And in the current environment — characterized by less accessible capital and lower valuations — startups will face challenges raising new capital, forcing them to assess their cash constraints.

Today, massive top line growth cannot come at the expense of poor unit economics or inefficient expansion strategies. Startups with limited cash reserves will likely struggle to invest heavily in growth at the same pace as in recent years. Consequently, many will shift their strategic focus to reducing cash outflows and extending their financial runway, aiming for profitability or outlining a clear path to it. The imperative to chart a course to profitability has most prominently intensified among late-stage startups. However, early-stage companies will also encounter more targeted inquiries about their profitability plans.

While a renewed focus on profitability and efficiency is evident, Bessemer Venture Partners and its Rule of X present a noteworthy counterpoint, suggesting that even in tighter markets, growth should occupy a stronger weighting than margin improvement for its compounding effects.

Overall, the past two years — marked by uncertainty, escalating interest rates, and sluggish or stagnant growth — have posed significant challenges for both VC investors and startups. Amid a general downturn in funding and valuations, numerous founders approach 2024 with apprehension as the end of their runways looms. Further, investors will adopt a heightened focus on due diligence, product-market fit, and a clear path to profitability in pursuing new opportunities.

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