U.S. venture capital (“VC”) investing is expected to increase, according to the 2024 U.S. Venture Capital Outlook recently published by Pitchbook, a financial data and software company
Following a turbulent 2023, Pitchbook makes several positive projections for 2024:
- Positive economic signals in 2023 indicate a comeback in IPOs in 2024.
- U.S. VC fundraising is expected to increase, making it stronger than 2023 and comparable with 2020 figures.
- The number of insider-led rounds as a proportion of all U.S. VC deals will be on par with or exceed the 2023 annual level.
- Flat or declining interest rates in 2024 will lead to an increase in U.S. VC deal activity with nontraditional VC investor participation.
The turbulence of 2023 included the collapse of Silicon Valley Bank (SVB), which set off anxiety and skepticism among investors. After the initial shock, however, the SVB collapse led to little disruption throughout the year. Now, as public markets begin to restabilize, increased demand for IPOs should create a realistic pathway for worthy VC-backed startups and corresponding liquidity for investors.
Pitchbook suspects a market reset is in process, which will boost this trajectory throughout 2024. Financial markets had high-interest rates and rapid inflation over the past year, both of which played a major factor in hindering market activity. Key indicators such as deal flow, exit opportunities, and regulatory changes provide insights into the potential for a rebound. While there are insufficient indicators to support an immediate significant rebound, an interest rate decline in 2024 and a slowdown of inflation should create a less risky environment for early and late-stage investors and ultimately drive dealmaking.
Insider-led funding rounds have become increasingly common. While this can result in higher valuations and more control for existing investors, it raises concerns about inflated valuations (due to a lack of true third-party market pricing) and limited influence for new investors and stakeholders (potentially resulting in stagnant strategic decision-making).
Importantly, dry powder, the amount of committed but unspent capital within the investment fund community, remains high in 2024. According to Pitchbook, more than 4,000 funds have been raised since the start of 2020. With substantial capital available, we expect to see significant pressure to deploy capital and shed the risk-averse approach of 2023.
PitchBook predicts that if interest rates remain flat or decline in 2024, not only will VC dealmaking increase, but we will see an increase in nontraditional VC investor participation. Since 2022, there has been a sharp decline of nontraditional investors in the VC space, which ran concurrently with the spike in interest rates that began in March 2022. If we see interest rates trending down, signs point to a potential drive in nontraditional investors seeking higher returns through alternative spaces, such as VC.