Has VC funding dried up?
October's investment total marks the acceleration of the trend: VC funding has gradually tapered off since the record year of 2021, and some investors have warned of a possible "mass-extinction event." Down rounds, often loathed by VCs and startups alike, have become far more commonplace than usual.
Venture capitalists say they are avoiding funding businesses that lack clear signs of revenue growth or a path to profitability. The higher bar has led to a stark decrease in funding: Investment in U.S. tech startups declined 49% in the year ended June 30, according to data from PitchBook.
The downward march of VC funding numbers that began in Q1 2022 and accelerated in the third quarter continues to drag on into the current year. Global VC funding fell 53% year over year in Q1 2023 to $76 billion — and that's counting two mighty lifts by OpenAI and Stripe, which each raised billions in recent months.
In contrast to the steadiness observed in VC deal numbers, the dollars invested in venture capital is projected to experience a significant decline in 2023, potentially one third less than in 2022. This will result in the average dollar investment per deal to decrease from $16 million in 2022 to $10 million in 2023.
On the heels of its unprecedented growth over the last decade, it's possible that the space is just too saturated to sustain itself. "If you look at the industry as a whole, it's too big," Sheel Mohnot, general partner at Better Tomorrow Ventures, told Vice last summer. "The industry has to shrink...
The average venture capital firm receives more than 1,000 proposals per year. Approximately 30% of startups with venture backing end up failing. Around 75% of all fintech startups crash within two decades. Startups in the technology industry have the highest failure rate in the United States.
The past two years have been a time of significant change in the venture ecosystem, with a record-breaking flurry of funding activity in 2021 giving way to a market slowdown in late 2022 and into 2023. But not every sector has experienced that slowdown the same way.
In 2023, 58% of venture capital has been deployed in investors' home markets. This is the highest percentage of domestic market investment of any year, and higher even than locked down 2020 (55%).
Here is why few VCs earn most of VC profits: Home runs are key to VC returns because VCs fail on about 80% of their investments. Only about 19 are successes and one is a home run, and these profitable ventures have to pay for the failures and offer a return.
Venture capital funds typically have long tenures, beginning the first closing and running for 8-10 years. Fund managers usually seek pre-determined extension periods (2-3 years for example) to allow them for a smooth exit from all investments. Early termination is also possible, based on certain trigger events.
How many VC investments fail?
Experts from The National Venture Capital Association estimate that 25% to 30% of startups backed by VC funding go on to fail.
Health technologies and biomedicine, renewable energy, digital economy and fintech, and logistics and Artificial Intelligence are areas that offer lucrative opportunities for visionary investors looking to be part of the transformation and growth in the near future.
Successful startup founders have the highest success rates on their VC investments, nearly 30 percent. They are followed by professional VCs at just over 23 percent, and unsuccessful founder-VCs at just over 19 percent.
There are two main risks when it comes to taking on venture capital: 1) The risk of not getting the investment; and 2) The risk of not being able to pay back the investment. The first risk is that your startup won't be able to raise the money it needs from investors.
Early-stage funds, particularly new fund managers in the pre-seed to seed stage, are enjoying high returns as the VC market is thriving. Exits in US VC-backed startups have doubled in 2021, compared to levels seen in the previous two years and there is more liquidity in venture capital than ever before.
Overall outlook. Heading into 2024, the conditions for raising venture capital will continue to be challenging. We expect we will see many companies compete to fundraise in 2024. There are a large number of companies in the pipeline that haven't raised since 2021 and will need to raise more capital.
The National Bureau of Economic Research has stated that a 25 percent return on a venture capital investment is the average. Most venture capitalists or venture capital returns will expect to at least receive this 25 percent return on investment.
They expect a return of between 25% and 35% per year over the lifetime of the investment. Because these investments represent such a tiny part of the institutional investors' portfolios, venture capitalists have a lot of latitude.
In 2022, only 1% of VC funding went to Black founders, dropping by 45% from 2021, versus 36% for the industry overall. Semyon Dukach, the founding partner of Boston-based One Way Ventures, also likes the idea of more transparent data, and stresses the need for more diversity.
While venture capital firms are sitting on more than $270 billion of unemployed capital as of mid-2023, their own pace of fundraising has also slowed. PitchBook data showed U.S. venture capital firms raised $67 billion in 2023, marking a 60% drop year-over-year and a six-year low.
What happens at the end of a VC fund?
In venture capital, a “close” or “closing” happens when a fund has legally secured commitments from Limited Partners (LPs) for a target portion of the intended total fund size. These commitments represent pledges from LPs to contribute specific amounts of capital to the fund.
While the founders may be able to move on to other projects and opportunities, the investors who trusted their money with the startup may find that their losses are much greater. For starters, VCs may lose the money they invested in the failed startup, as well as any fees that were associated with the investment.
With less than 200 VC-backed IPOs globally in 2023, the market for VC-backed IPOs remains mostly closed, especially in the US. Meanwhile, at 8,351 deals in 2023, M&A volume has fallen from a 2021 peak but remains elevated historically. 2023 sees 71 new unicorns — a 7-year low, and down 73% from 2022.
We will see a rebound in VC fundraising
“In the coming year, we will see a rebound in VC fundraising from the depths of 2023 – though don't expect fundraising to hit the highs of 2020 and 2021, as managers will continue to face an uphill battle securing commitments.
Investors do not like the tax implications of an LLC because as a partner, they'll be taxed on the entity's income even in years when no cash is distributed to them personally. VCs often avoid this structure as they don't want business profits or losses passing through to them directly.
