After years of raising over $100 billion annually, start-ups seeking funding from venture capital firms may have to prepare themselves for the worst thanks to increasingly challenging market conditions.
An EY analysis noted that in 2023, venture firms invested $140 billion in portfolio companies. In every year since 2018, venture-backed portfolio companies have raised more than $100 billion.
“I’ve put a prediction out there that we won’t hit $100 billion,” said Jeff Grabow, U.S. venture capital leader for EY. “There’s going to be some really big deals getting done, though.”
Venture funding started to slide in 2022, along with the rest of the economy, after a heady few years of fast-paced capital raising. That trend continued in 2023: Just $23 billion was deployed in the fourth quarter, which was 23 percent lower than the third quarter, according to EY.
“There was a deceleration of capital throughout the year ... and companies were trying to stay out of a tough fundraising environment,” Grabow said. “They went defensive.”
Deal count dropped too — venture firms invested in just 2,000 companies in the fourth quarter, the lowest since 2012. To be sure, the holidays in the United States always result in a slowdown in the final quarter of the year. But that figure is notable in the context of the broader market: According to Grabow, there are more than 50,000 venture-backed startups in the United States, a ten-fold increase from 2004.
In other words, there are more companies in the market, and fewer are getting access to capital.
“There’s a lot of noise,” Grabow said. “If you’re going out and fundraising, that’s a huge amount of competition.”
Portfolio companies have found ways to work around the dearth of capital. Some have cut costs with layoffs or by narrowing their focus. Others have asked customers to pay upfront for services, rather than monthly, to shore up capital sooner. And some have taken to outsourcing certain functions to reduce costs.
That’s not to say that venture-backed companies can’t expect to raise capital in 2024. It might just be more challenging.
“People have been taking their time relative to what they have been for the past three to five years,” Grabow said. “It’s been incredibly fast paced, incredibly hectic. Now you don’t see that anymore. It’s going back to the old ways of how things used to get done where people were able to take their time.”
EY predicts that the first quarter of the year could see less than $20 billion deployed in the venture markets. There are some areas that will remain attractive to investors, particularly companies that have an artificial intelligence angle.
“We’ve seen companies pivoting to AI because AI is pivoting at them,” Grabow said. But the pace in 2024 won’t be quite as frenetic as it was in 2023 as “investors exhibit a little bit more caution.”