Q1 ebook

VC Investors Face ‘Tough Math’ as Deal-Making Slows

VC Investors Face ‘Tough Math’ as Deal-Making Slows

Last year was the worst year for venture capital funding since 2016.

So far, 2024 isn’t shaping up to be much better.

Venture firms raised $30.4 billion from foundations, university endowments and other institutional investors in the first quarter of the year, a decline from 2023, the Financial Times (FT) reported Wednesday (April 3).

The struggle suggests the end of a period of “megafunds” and a slowdown in startup deal-making in the coming years, the report said. Investors have grown more cautious as interest rates have risen, public listings and sales — so-called startup “exits” — have slowed, and returns from venture fund managers have fallen.

“Why has there been such a sustained slowdown? At the core of the issue is exits,” Kaidi Gao, a venture capital analyst at PitchBook, told FT. “Unless we see meaningful improvements from the exit market, we’re expecting fundraising difficulties to linger, and that will put downward pressure on deal-making.”

Fundraising has slowed since 2021, when venture capital groups took in $555 billion, according to the report. Last year, they raised a third of that amount. In the first three months of this year, $9.3 billion was raised in the United States, about one-tenth of the total raised in 2023.

“We want to be there for our partners, but we don’t want to put ourselves in a hole,” said the chief investment officer of a large American foundation, per the report. “It’s tough math for a lot of investors.”

Last month saw reports that startups in Europe were becoming more reliant on convertible debt as funding dries up.

Convertible debt, which becomes equity over time, can help founders raise money quickly without having to publish new valuations. The volume of convertible debt issued by European VC-backed firms hit a record $2.5 billion last year, up $1.7 billion in 2022.

As to the question of “exits,” PYMNTS wrote last month about the rocky path facing companies amid a ramping up in initial public offering (IPO) activity.

“There’s demand brewing for deal-making, for startups to be snapped up in the bid to buy rather than build operations, and for FinTech firms, in particular, to go public as they raise capital,” the report said.

“However, as March got underway, of the nearly four dozen FinTechs tracked by PYMNTS Intelligence, only five names have been trading above their offer price,” the report added. “Despite the 55% gain in the FinTech IPO Index recorded for 2023, the absolute returns to date have been, at best, spotty.”