Many startups are hoping that the gradual opening of an IPO window and the prospect of interest rate cuts later this year will finally encourage VCs to be less stingy with their capital.
But it’s unlikely that the startup fundraising slog will get much easier anytime soon, not least because of venture capital’s own fundraising challenges.
In the first quarter, US VC funds raised only $9.3 billion, according to PitchBook data. At this rate, VC fundraising will end 2024 at just over $37 billion, the lowest capital raised since 2013 and a 54% drop from last year.
Just like startups, VCs struggle to attract new capital from their backers, known as limited partners, such as endowments, foundations and pension funds. The drastic decline in IPO and M&A activity over the past two years has meant that LPs have had meager cash distributions from their VC capital investments.
“We are coming out of a 2020 to 2021 period when [LPs] he had a fear of missing out and was rushing to get involved,” said Kirsten Morin, co-head of venture capital at HighVista Strategies, an asset manager that invests in venture capital. “Now they’re licking their wounds and saying, ‘Oh no, I invested at the top of the market. It will be a while before I see distributions.”
Other limited partners say they will be extremely cautious with their investments until startup IPOs increase significantly. The successful offerings of Reddit and Astera Labs aren’t nearly enough to get LPs excited about the venture again.
Branded companies will continue to raise capital, but they may have less capital to invest in startups than in the past. Take IVP, for example. The 43-year-old venture capital firm closed a $1.6 billion fund last month, down more than 11% from the $1.8 billion vehicle it raised in 2021.
However, attracting new capital from LPs will not be so easy for smaller and newer VCs. “I think a lot of people may leave the business in the next few years,” said Chris Douvos, chief executive at Ahoy Capitalthat invests in funds and startups.
While this isn’t great news for existing startups, it’s not doom and gloom either. PitchBook estimates that dry powder, the amount of capital VCs still have to invest from previous funds, remains high.
However, this amount will be reduced if LPs do not reopen their funds.
“One quarter of low fundraising isn’t going to make or break the future of VC,” said Kyle Stanford, chief venture capital analyst at PitchBook. “But if this continues, it will be a blow to deal-making.”
