Venture Capital Market Still Sluggish Despite Fed Rate Cut

A Quarterly Wink and a Glance at Venture Capital 

The venture capital (“VC”) market continues to be negatively impacted by the lack of exits and the resulting lack of distributions to limited partners. High inflation and high interest rates certainly add to the struggles in the VC space. The continued slowdown in dealmaking and VC fundraising can be traced back to the lack of exits. In Q3, only 14 companies completed a public listing, and only $10.4 billion in exit value was achieved.  

Insider Rounds and Bridge Financings Make Deal Counts Misleading  

Q3 saw 3,775 completed VC deals. For the first three quarters of 2024, 11,834 deals were completed at a value of $131.4 billion. This is on par with the 14,813 deals valued at $161.3 billion in all of 2023. VC dollars invested in 2024 are still way below VC dollars invested in the low-interest years of 2021 and 2022. For context, VC dollars invested in 2021 and 2022 were $353 billion and $241 billion, respectively. 

Venture-Backed Companies Stay Private Longer 

VC-backed unicorn companies, those valued at $1 billion or more, represent approximately $2.5 trillion of value sitting in the portfolios of VC funds. About 40% of these unicorns have been in the portfolio of the VC funds for more than nine years. The longer it takes VCs to monetize these unicorn companies, the lower the internal rate of return will be, and the more difficult it will be to return capital to LPs. 

There are approximately 58,000 VC-backed companies operating today. More than 32% of these companies are late-stage or venture growth-stage companies. Realizing value from these companies that have remained private for longer than expected will help to put the VC market back on the right track. With exits not on the horizon, many VC-backed companies have been forced to cut costs to extend their existing cash as long as possible. 

Deal Sizes and Valuations Trend Higher 

Both median deal sizes and pre-money valuations have been trending higher in 2024 compared to 2023. This upward trend, while good for the VC market, was caused primarily by some significant AI deals and some companies that have come back into the market after not raising capital for two to three years. These companies last raised money when valuations were at all-time highs. Median deal values for the first nine months of 2024 for seed, Series A, Series B, Series C, and Series D and beyond were $3.1 million, $12.5 million, $28.2 million, $44.4 million, and $97 million, respectively. The largest increases in deal value were seen at the Series C and Series D+ levels. Median VC deal sizes were up 80% for Series D+ and 31% for Series C. 

Pre-money valuations for the first nine months of 2024 for seed, Series A, Series B, Series C, and Series D and beyond were $13 million, $39.7 million, $104.2 million, $218.4 million, and $700 million, respectively. The largest increases in pre-money valuations were seen at the Series D+ stage: 98% and at the Series A stage: 24%. 

VC Activity Concentrated in Large Coastal Cities  

It should come as no surprise that VC activity in Q3 2024 was concentrated in the VC hubs of San Francisco, New York, Los Angeles, and Boston. The Bay Area led the way with 564 deals valued at $12.1 billion. The Bay Area was followed by New York with 406 deals valued at $5.7 billion, Los Angeles with 196 deals worth $3.4 billion, and Boston with 188 deals worth $3.6 billion. 

Exits Continue to Be Impacted by Lack of IPOs 

Q3 only experienced $10.4 billion in exits from 243 VC-backed companies. Through the first three quarters of 2024, there have been 938 exits totaling approximately $69 billion. This puts 2024 exit activity in line with 2023 and 2022 when exit values totaled $71.6 billion and $89.2 billion, respectively. These results fall way short of the exit values seen in 2021 ($779.8 billion) and 2020 ($298.1 billion). In this sluggish market, most of the largest exits came from the pharma and biotech spaces. 

With this shortage of exits comes the pressure on GPs to create liquidity for their LPs. With no change in the exit markets expected soon, GPs are turning to non-traditional ways to return capital to GPs—primarily through secondary offerings and continuation funds.  

Fundraising Still Sluggish but Should Exceed 2023 

Through Q3, $65.1 billion has been raised across 380 funds. At this rate, 2024 fundraising should exceed 2023 fundraising of $86.3 billion across 836 funds. This year will have the fewest number of funds raising capital in the last 10 years. Capital continues to be concentrated in larger funds with more experienced and successful managers. For the first nine months of 2024, more than 81% of the capital raised by VCs went to established GPs. 

Another reason for the slow fundraising market is that many VCs have postponed their fundraising efforts to 2025 when they expect overall market conditions to dramatically improve. This delay will allow many VCs to improve their fund metrics, possibly improving the chances of raising money in the future. 

Outlook 

Lack of distributions to LPs in 2024 continues to effect VC dealmaking and fundraising. The recent Fed interest rate cut of 50 basis points is certainly a step in the right direction to get the VC market back on track. There is certainly a lot of liquidity locked up in the $2.5 trillion dollars of unicorn companies and in the thousands of VC-backed companies that have made the decision to stay private longer. Will further interest cuts by the Fed be enough to create exit activities for VC-backed companies?