Why a VC Recovery Didn’t Happen in 2024

A Quarterly Wink and a Glance at Venture Capital 

Many thought 2024 would be the year that the venture capital (“VC”) market rebounded in terms of dollars deployed and distributions to LPs from exit activity. Venture activity did begin to show signs of a recovery, with deal values and counts both exceeding 2023. Exit activity in 2024 exceeded 2023 by 10% for the number of exits and 24% for exit values. The 2024 exit activity was certainly impacted by larger exits. A total of 42% of the exit value was attributed to only 21 exits equal to or more than $1 billion. With the large number of highly valued private companies (more than $1 billion) and the large amount of VC dollars deployed over the last decade, 2024 exit activity certainly did not live up to expectations. 

Dealmaking Impacted by Larger Deals 

Last year saw $209 billion of completed deal value from 15,260 deals. This compares favorably to the $162 billion of deal value from 14,712 deals in 2023. Larger deals continue to influence the market. Of the $74 billion of deal value in Q4 2024, only 15 companies (out of 4,000 deals completed in the quarter) accounted for more than 54% of the quarter’s deal value.  

AI and ML Companies Dominate VC Investment Landscape 

Artificial intelligence (“AI”) and machine learning (“ML”) companies accounted for more than 40% of the total 2024 deal value. AI investment opportunities are certainly a significant reason why deal values are up across all series. Many VCs still have “fear of missing out” on the next great AI and/or ML company. In fact, the five largest VC deals in Q4 were all AI and ML companies. There is no sign that investments in AI and ML companies will slow down anytime soon, so there is certainly reason for optimism heading into 2025. 

VC-Backed Unicorns Show Their Age 

With exit activity slowing down considerably over the past three years, there is significant value locked up in older VC-backed unicorn companies. Almost 45% of VC-backed unicorns have been in the VCs’ portfolio longer than nine years. For these companies, the median time since their initial VC round is currently 8.5 years, and most have not raised capital since the market highs of 2021 and 2022. Once the IPO market opens up again, there certainly should not be a shortage of high-quality, VC-backed companies waiting to go public. 

Pre-Money Valuations Up Across All Rounds 

This past year saw median pre-money valuations increase across all stages of VC investment, with the largest increases seen at the Series C and beyond stages. Median pre-money valuations in 2024 at the seed, Series A, Series B, Series C, and post-Series C stage were $14 million, $40 million, $105 million, $248 million, and $754 million, respectively. One of the reasons for the increase in valuations at the later stages is that companies are staying private longer and continuing to use VC capital to achieve targets and milestones. As such, better quality companies are raising later stages of private capital. 

Five Largest Markets for VC Deal Activity 

It is unsurprising that the largest markets for VC activity in Q4 2024 were on the West Coast and the East Coast. San Francisco led the way with a total deal value of $46 billion, followed by New York ($6 billion), Boston ($4 billion), Los Angeles ($2.3 billion), and Denver ($2 billion). Other markets approaching the top five were Philadelphia, Austin, and Chicago. 

Lack of Exits and Liquidity Continue to Affect VC Landscape 

The lack of exits for VC-backed companies continues to adversely affect distributions to LPs. With the IPO market continuing to sputter along, M&As are forced to play a more significant role in returning capital to LPs. M&A markets have certainly been tested due to the uncertainty around interest rates, geopolitical situation, presidential election year, and general concerns about the economy. 

In 2024, exits were valued at $149 billion, which compares favorably to the $120 billion of exits achieved in 2023. However, the 2024 exit numbers are way below the exit activity of 2021, 2020, and 2019—which were $842 billion, $339 billion, and $312 billion, respectively. With a growing inventory of more than 58,000 VC-backed companies and $2.7 trillion of VC-backed unicorns, exit values for 2024 appear weaker and below expectations. 

Not a Great Year for Fundraising 

In 2024, VC fundraising totaled $76 billion across only 508 funds. This compared unfavorably to the $98 billion raised for 937 funds in 2023. In fact, the 508 funds that raised capital in 2024 was the lowest number of funds to raise capital since 2014. Most of the funds that were successful in raising new funds were larger and more established. In 2024, approximately 80% of the fundraising was accomplished by established funds. The failure of VCs to return capital to LPs through exits is a major reason why LPs are either unable or unwilling to allocate additional capital to the venture space. 

Going Forward 

Last year was better than expected in terms of dealmaking and valuations. Both could be attributed to the large amounts of dry powder accumulated over the last few years. AI continues to be a driving force behind VC dealmaking, with more than 40% of the 2024 deal value in AI and ML deals.  

Exits through IPOs and M&As continue to be a problem for the VC sector. Lack of exits continues to contribute to low distributions to LPs and the failure to recycle funds into new VC funds. However, it is not all doom and gloom. There are many reasons to be optimistic about VC in 2025. Here’s why 2025 could be a great year for VCs: $2.7 trillion of VC-backed unicorns waiting for exits, large amounts of dry powder sitting on the sidelines, interest rates trending lower and valuations trending higher, and the fear of missing out on AI and ML deals. Time will tell if VC returns to the record levels of 2021 and 2022.