It’s hard to say that the future of venture capital is looking brighter. But maybe it’s turned a corner?
Rising interest rates and fear of a recession in the U.S. made 2022 and 2023 terrible years in venture capital, a period that included a five-quarter streak of negative performance. That streak broke in the second quarter last year, when VC funds returned 0.2 percent, according to a report by BlackRock’s eFront, which calculated the return using the cash flow information of 2,431 VC funds a (mix of early-stage, balanced, and late-stage) on a net-of-fee basis. But the second quarter’s positive momentum didn’t continue into the second half of 2023.
Preqin’s latest VC report showed that VC funds were down 1 percent in the third quarter last year. Tallied up with the other quarters, they were down 3 percent through the first nine months of 2023. However, like the eFront report suggested, the downward trend appears to have slowed, at least relative to the 20 percent drawdown in 2022. Fourth quarter datasets for the broad VC market aren’t rolling out yet.
As a result of the uninspiring performance, there is mixed sentiment about what the VC market will be like this year.
In November, venture capitalists told Preqin that they were more positive about future performance — 30 percent expected their portfolio would worsen over the next 12 months, down from 48 percent just six months before. “Responses suggest a lack of consensus, or at least high uncertainty, and the low transaction volumes show that investors are still sitting on the sidelines even as they are wondering whether a recovery is due,” the Preqin report said.
Deal volume and valuations climbed to stratospheric levels in 2020 and 2021, supporting huge VC funds along the way which are now struggling. In 2021, 1,397 U.S.-based venture funds raised $157.8 billion and in 2022, 1,057 funds raised $168.3 billion (more than twice the number of funds and more than four times the capital raised 10 years ago), according to PitchBook. Half way through 2023, just 197 funds raised $27.6 billion.
Kauffman Fellows, an organization with a two-year development program for distinguished venture capitalists, surveyed 250 founding and managing partners and reported in December that, while they were less confident about portfolio company exits, they were more upbeat about fundraising in 2024. Meanwhile, EY says VC fundraising could hit a five-year low in 2024.
“Looking ahead, there aren’t indicators of a significant rebound in the near term. The factors that led to the slowdown essentially remain in place. Interest rates and geopolitical tensions continue to be high; inflation has been relatively stubborn as the U.S. economy stays hotter than expected, and a recession is still a possibility, adding to the uncertainty. Not to mention that election years can hold their own surprises,” PitchBook said in its 2024 venture capital outlook report in December.
“Maybe the most important for VC is the down shift in the [price-to-sales] multiples in the public markets. These remain deflated compared with the multiples that private valuations were based on over the past few years, adding a high hurdle for companies looking to go public.”