The Crossover Investors Who Drove Last Year’s Record Funding Are Fleeing VC

Investors are expected to retreat from growth-stage startups as they grapple with illiquidity concerns and rising interest rates, according to PitchBook.

Illustration by II

Illustration by II

Venture capital is expected to see less capital from crossover investors in 2023, signaling a general downturn for the pre-IPO industry.

According to PitchBook’s 2023 Venture Capital Outlook, economic uncertainty has nontraditional investors — hedge funds and any other investment organizations not related to a VC firm — quickly pulling back on the opportunistic venture strategies that drove valuations to new heights in recent years.

“This leaves the venture growth stage with a high number of companies and much lower capital availability,” the report stated. “Alongside this, we may simply see fewer companies looking to raise at this stage of VC, instead focusing on sustainable growth and cost-cutting in order to stay away from the difficult capital-raising market.”

The outlook is “problematic” for the companies in the venture growth category, which is often where the largest investments are made. Last year, 80.5 percent of deal value in the category was derived from deals with nontraditional investor participation. Averaged over the last five years, that figure comes out to 73.9 percent.

This year, that trend has taken a sharp turn. In the third quarter, the largest nontraditional investors participated in deals that totaled less than $12 billion across 211 investments — $33 billion less than last year’s quarterly peak, with 304 fewer investments than last year’s record quarter.

“The volatile market has revealed nontraditional investor activity in VC to be simply opportunistic,” the report stated. “For many nontraditional investors, liquidity risk is high.”


The gap between the demand and supply of capital has widened further throughout 2022, setting the stage for a challenging environment for start-ups in the new year. The lack of capital doesn’t just translate to fewer IPOs — it could result in down rounds or even outright failures of some companies, according to PitchBook.

The venture growth segment peaked in 2021, reaching $90.9 billion across 988 deals. As of November 2022, the total has fallen to $51.5 billion across 738 deals.

Venture fundraising, meanwhile, has hit a historic high in 2022 — but PitchBook expects a slowdown in the new year as limited partners wrestle with liquidity issues and search for alternative investments that are positively correlated with rising interest rates.

“Declining public equity valuations can create a ‘denominator effect’ for many LPs, such as endowments, pension funds, and sovereign wealth funds , whose venture asset holdings become too large relative to other asset classes outlined in their mandates,” the report stated. “Declining public market valuations also create an additional liquidity crunch for many LPs, as public equity markdowns reduce the capital they can expect to receive as lockup periods for recent exits expire. Rising interest rates, which are largely to blame for the downward trend in equity valuations, have also created lower-risk opportunities for LP capital in other asset classes, taking even more attention away from private market fundraising.”