Current State of the Venture Capital Industry

The state of global venture capital

Global venture capital has quadrupled in the last decade. Venture capital investment activity is slowing after years of exaggerated expansion such as the 2020/2021 period, but still enjoys a continued structural tailwind. In 2022, nearly $540 billion will be invested in technology companies worldwide.

The main difference is that, although Private Equity investors prefer stable companies, Venture Capitalists usually come during the startup phase. Venture Capital is generally awarded to small businesses with high growth potential

 

What is the difference between Private Equity and Venture Capital?

Venture Capital is a form of Private Equity. The main difference is that, while Private Equity investors prefer stable companies, Venture Capitalists usually come during the startup phase. Venture Capital is generally awarded to small businesses with high growth potential.

 

Dynamics on a global scale show that while America leads overall venture capital investment, the EMEA region is showing continued growth over the past five years.

By geography

Looking at the world’s top countries for venture capital investment on an annual and quarterly basis, the United States, China and the United Kingdom historically attract the most venture capital investment, but smaller economies such as Singapore, South Korea and Switzerland can also attract significant investments for this sector.

By stage

In 2022, the investments of $540 billion were destined entirely to global technology companies in different sectors and with different levels of specialty.

Global risk capital by destination ($B) by accumulated percentages (Chart 1)

 

 

Venture capital is always analyzed in which of the stages it is in:

– Startup stage (rounds from 0 to 15 million dollars).

– Breakout stage (rounds from 15 to 100 million dollars).

– Expansion (rounds of more than 100 million dollars).

This provides a more consistent and timeless segmentation of the venture capital and startup landscape.

The amount raised, as well as a number of mega rounds, are on a downward trend, however, some of the largest mega rounds in history occurred after 2021.

The Crunchbase Mega Deals Board

The Crunchbase Megadeals leaderboard is a curated list of $100M+ venture capital funding rounds in 2023 for private companies based in the United States. While venture funding so far in 2023 has been considerably slower than in 2021 (a record year for venture capital investment), there are still some companies raising large rounds. This dashboard is powered by full company data from Crunchbase.

 

Open AI raised $10 billion in January 2023, followed by Stripe raising $6.5 billion in March of the same year.

If the main countries in the world by venture capital investment are analyzed annually and quarterly, the United States, China and the United Kingdom historically attract the largest venture capital investment

 

 

By stage and destination

The later stage rounds are more skewed towards the United States and Asia, while Europe faces the United States in an early stage.

By industry

Companies are segmented on Dealroom based on Dealroom’s proprietary taxonomy. The Dealroom Intelligence Unit has developed a proprietary technology taxonomy that acts as a foundation and helps you navigate existing and emerging technologies.

The basic structure with this system is as follows:

Customer orientation: B2B, B2C

Income streams: Subscription, Advertising, Commission, Sale of own inventory

Business models: SaaS, Marketplaces and e-commerce, Manufacturing (physical products)

Technologies

Deep technology, Artificial intelligence, Hardware, Mobile application, Machine learning, Big data, Blockchain, IoT (Internet of things), 3D technology, Computer vision, Virtual reality, Recognition technology, Augmented reality, Connected device, Nanotechnology, Technology autonomous and sensor, Deep learning, Natural language processing, Quantum technologies, 3D.

Industries

Health, FinTech, Food, Media, Marketing, Business Software, Transportation, Fashion, Real Estate, Home Life, Education, Kids, Energy, Wellness, Beauty, Sports, Hosting, Gaming, Travel, Semiconductors, Music, event technology, job recruitment, Security, Legal, Robotics, Telecommunications, Dating, Service Provider, Engineering and Manufacturing Equipment, Space, Consumer Electronics, Chemicals.

While venture funding so far in 2023 has been considerably slower than in 2021 (a record year for venture capital investment), there are still some companies raising large rounds

 

 

SaaS has steadily become the most prominent investment category in venture capital, with nearly half of global venture capital investment going into saas companies. 90% of all SaaS investment goes to B2B companies.

Investment in SaaS in the industrial sector exceeds 490 million in 2023. Software as a Service (SaaS) continues to gain ground in the industry with compound annual growth forecasts of 17.5% looking to 2026 and revenues of 800 millions of euros. Initial investment in SaaS companies has increased in the last decade

Fintech and Health have consistently topped venture capital investment charts by industry over the past five years.

However, Energy is the sector that registered the least slowdown after the 2021 boom.

More than 400 cities around the world that have founded or host a unicorn company. Unicorn companies are those that reach a valuation of 1 billion dollars without having a presence on the stock market and are the dream of any technological start-up that gets going. What factors intervene in the success of these companies?

After the boom in late 2020, unicorn creation has slowed rapidly.

 

The Current State of Venture Capital: Three Things Investors Need to Think About Right Now

As managing partner of MGV, Marc Schröder focuses on working with world-class technology entrepreneurs and establishing MGV’s legacy.

Early stage venture capital is a dynamic and rapidly evolving field. What he maintains is that “As a co-founder of an early-stage venture capital firm that invests in American technology companies, I have a front-row seat to the ever-changing dynamics of early-stage venture capital investing.”

Currently, we are seeing the impact of remote work and online interactions, an increased focus on environmental, social and governance factors, and a growing interest in underrepresented founders and diverse teams. Finally, both investors and startups are having to deal with growing economic uncertainty.

Let’s take a closer look at each of these factors and what investors need to know:

– Remote interactions

One of the most significant changes in early-stage venture capital has been the shift toward remote work and online interactions.

The pandemic accelerated that trend, with many venture capital firms and startups moving their operations entirely online.

The Dealroom Intelligence Unit has developed a proprietary technology taxonomy that acts as a foundation and helps you navigate existing and emerging technologies

 

 

Impact in the initial stage

This has had a significant impact on the way early-stage investors evaluate and interact with startups.

For example, it has become increasingly important for startups to have a strong online presence and a clear digital marketing strategy. Until recently, many investors conducted virtual meetings and due diligence remotely, which can make it more difficult for startups to stand out and make a good impression.

However, when in-person meetings became viable again, almost all VCs began demanding more in-person time (even if the first conversations were remote). Because?

Investors spend enormous amounts of time getting to know founders to try to understand who they are as people before investing

“It’s difficult (and, frankly, risky) to meet someone only in a remote setting. During the pandemic, we were forced to do this, but it is not a smart way for venture capitalists to do business.”

That said, if remote interactions are your only option, referrals are essential.

The goal is to deeply understand the founder, so the more data an investor can gather, the better. Ask yourself: if the company you are being offered ends up failing, would you invest in that person again? If the answer is no, then I would say he may not be the founder you want to invest in.

-ESG and diversity

Another key trend in early-stage venture capital is an increased focus on ESG factors. This includes not only environmental concerns, but also social and governance issues.

Limited partners are increasingly aware of the risks and opportunities associated with these issues and are seeking startups and venture funds that meaningfully address them, such as startups that are developing sustainable products and services or those that are working to promote sustainability. diversity, equity and inclusion.

 

In line with this trend, there is also growing interest in underrepresented founders and diverse teams

Bloomberg reported (paywall) last year that “about 56% of North American-based investors said they expect to allocate capital to venture capital fund managers that invest significantly or exclusively in companies founded by women.”

Investors are recognizing that startups founded and led by underrepresented groups can bring unique perspectives and experiences, and that diverse teams can be more innovative and successful.

As a result, many investors actively seek out and invest in startups founded by women, people of color, and members of the LGBTQ+ community, among others.

At MGV, their portfolio is made up of 18% female founders, 67% have at least one BIPOC founder, and 39% have a full BIPOC team. BIPOC is an acronym in English for black, indigenous and people of color, which translates as ‘black, indigenous and people of color’

The diversity of their portfolio has allowed them to take a more community-focused approach.

“We work hard to keep our founders connected to each other so they can share lessons and ideas and compare notes. “Having a group of people from diverse backgrounds has fostered a really great exchange of perspectives.”

Investment in SaaS in the industrial sector exceeds 490 million in 2023. Software as a Service (SaaS) continues to gain ground in the industry with compound annual growth forecasts of 17.5% with a view to 2026 and revenues of 800 million euros

 

The economy

In addition to these trends, investors in early-stage companies should also consider the current state of the economy and the overall startup ecosystem.

Last year was marked by significant economic uncertainty, and this had an impact on the startup landscape.

Many startups struggled to raise funds or generate revenue, and some were forced to close.

Support in difficult times

Investors should be aware of these challenges and be prepared to support their portfolio companies through difficult times, as well as look for unique offerings that stand out in the current market.

Enabling sales teams to execute is more important than ever. There must be clear and realistic metrics so that the funnel is clearly defined.

Conversion rates are also key here, especially as many sales teams have experienced layoffs.

Listen to customers and understand value

Founders must be prepared to adjust pricing and be flexible to ensure customers truly understand the benefit and get value.

Listening to customers is also essential right now because they are experiencing the same demands around creating efficiencies and continued growth.

“In my opinion, now is one of the best times to invest in early-stage startups because the current reset is giving rise to smarter, more efficient, more realistic and more organized startups.”

To take advantage of this moment, VCs must be prepared to provide more support and practical guidance to their portfolio. Early stage investors typically invest in startups that are in the early or pre-seed stages, and these startups are typically in the early stages of development and may not yet have a product or service.

Initial stage and risk

As such, early-stage investors must be comfortable with a higher level of risk and uncertainty. On the other hand, early-stage startups offer a degree of insulation from the current climate compared to their later-stage counterparts because these startups are not expected to go through the IPO process anytime soon and are not subject to the same income and profitability limitations.

The most important thing investors can do right now is spend time doing in-person due diligence to truly understand the founders as deeply as possible, incorporate ESG principles into their investment strategies, leverage the current economic climate to their advantage and immerse yourself in the help. and guide your portfolio through these tumultuous times.

Unicorn companies are those that reach a valuation of 1,000 million dollars without having a presence on the stock market and are the dream of any technological start-up that gets going

 

 

Venture capital investment remains sluggish as market seeks new normal

Jeffrey Grabow is EY’s US venture capital leader. He says venture capital dollars declined in the second quarter of 2023, but there are signs of life in seed activity.

Venture capital-backed companies raised $29.4 billion in the second quarter of 2023, a drop from the $44.4 billion raised in the first quarter of 2023.

Economic uncertainty and low IPO (Initial Public Offering) activity continue to hamper the market in the late stage.

An Initial Public Offering or IPO, for its acronym in English, “Initial Public Offering” is the process by which a private company issues shares to the general public and becomes a publicly traded company.

In a promising sign for the emerging economy, half of the venture capital deals last quarter were seed and Series A.

What is a Series A investment round?

Series A: Typically in this round, the amount invested is higher than in the seed round and is used to hire employees and start generating income. Normally the objective of those who contribute capital in this round is to sell said participation in the future, thus obtaining a high profitability.

What is a seed round?

Seed Rounds are the first rounds of financing for a company and precede the Series A. However, to reach the necessary stage to raise a seed round, some startups raise a pre-seed.

Existing businesses should continue to conserve cash and prioritize short-term imperatives while preparing long-term plans for when the market improves.

Current uncertainty about the economy, expected interest rate hikes, and the lingering fallout from bank failures continue to weigh on the startup ecosystem.

Currently, we are seeing the impact of remote work and online interactions, an increased focus on environmental, social and governance factors, and a growing interest in underrepresented founders and diverse teams

 

 

Falls in investment from the first to the second quarter of 2023

Venture capital (VC) investment in Q2 2023 fell to $29.4 billion, down from $44.4 billion in Q1 2023, a decline of 34%. However, the decline is not as marked as it seems.

In the first quarter of 2023, two mega-round deals accounted for $16.5 billion. This could indicate that the market is finding a new equilibrium.

 

Trends in venture capital investment in the United States over time

The market continues to be challenged by the valuations of many companies. In many cases, expectations between investors and entrepreneurs have not been harmonized. With the market in a more rational mode, companies looking to raise capital must show significant progress toward growth milestones, regardless of their valuations. In many cases, founders will need to review their valuations, especially as they consider their longer-term capital needs.

However, the new deals do not have the excess valuation of the previous market and are attractive to investors. As we have said before, now is a good time to start a company.

Early-stage activity has not been as affected as late-stage markets. Half of the venture capital deals in the second quarter of 2023 were seed and Series A, raising $7.2 billion which represented a quarter of venture capital investment.

While VC fund formation increased in the second quarter of 2023, it is nowhere near the levels we have seen recently. In some cases, existing funds have not fully invested previous funds or deployed capital from recently raised funds. Additionally, there could be some portfolio diversification as limited partners look for other more conservative or higher-yielding opportunities in the market given the recent heavy concentration in the venture capital space.

Venture capital can accelerate a company’s path to hypergrowth

Megaround financing

Mega round financing in the second quarter of 2023 raised $11.5 billion, with a rebound in deal numbers after five consecutive negative quarters. Fund deployment has slowed significantly as mega-round activity has slowed in recent quarters and the market has adopted a more measured pace.

While public markets remain closed, the environment is more challenging for companies seeking late-stage investments as their return depends on exit opportunities. Late-stage rounds are occurring in this environment, but far fewer than early-stage deals. As the IPO market thaws, we expect mega rounds to rebound.

Until recently, many investors conducted virtual meetings and due diligence remotely, which can make it harder for startups to stand out and make a good impression

 

Sectors

Information technology, healthcare, and business and financial services ranked as the top three sectors for the quarter. Investment in healthcare increased 10%, while both information technology and business and financial services decreased more than 45%.

While software continues to lead the subsectors, we have yet to see a significant increase in semiconductor deals since the passage of the CHIP and Science Act by Congress in 2022. At some point, we would expect the provisions of the act to begin encouraging greater activity. also among startups. This could contribute to a rebound in investment in information technology, which spans software, networks and hardware.

 

Artificial intelligence (AI), particularly generative AI

It has marked one of the few bright spots in the venture capital space this year, as a driving force behind software’s leadership among subsectors.

So far in 2023, $15.5 billion in funding has gone to AI startups.

While many startups are adopting AI and adapting it to their business models, AI is capital intensive. Companies need to train and add data to the large language models that power generative AI, which takes time and money. Still, we expect to see more companies integrate AI into their value propositions in the coming months. Those that can demonstrate truly disruptive innovation will continue to attract investment.

Regions

With just four deals in the top 10, the San Francisco Bay Area’s usual lead narrowed significantly. This quarter, the Bay Area only accounted for 31% of all dollars invested in the United States versus 40% on average.

This quarter, New York City ranked second with 17% of invested capital, followed by Boston. These three main regions are much more clustered than usual.

 

Activity was subdued in other regions, with Washington, DC pulling ahead of Los Angeles to finish fourth in terms of dollars raised. Washington, DC had three mega deals, led by a $260 million healthcare deal, while Los Angeles had just two mega deals totaling $270 million. Additionally, Austin’s business ecosystem continues to perform at a brisk pace. The region finished sixth in overall dollar volume, driven largely by FinTech activity.

Another key trend in early-stage venture capital is an increased focus on ESG factors. This includes not only environmental concerns, but also social and governance issues

 

 

The general market outlook for the second quarter of 2023 and advice for entrepreneurs

The market may be adjusting to its new normal. A reset will favor companies with certain characteristics:

– Consider your cash reserves and burn rates.

– Investors prefer companies that manage capital carefully.

– While cash needs to be managed, costs cannot be reduced to achieve long-term value and sustainability.

– Maintain appropriate levels of investment for key initiatives that prepare the company for the next level of financing.

– Plan ahead and be aggressive in scheduling meetings with potential investors.

Raising capital is a sales exercise

Focus on investors who believe in your value proposition. Founders must build a long-term relationship with investors, long before needing capital.

While the market may be approaching a new equilibrium, about half of U.S. venture-backed companies still need to raise capital in the coming quarters. This will test founders’ ability to navigate the complexities of the current fundraising climate.

However, this is still a good time to start a company. Founders who are able to tighten their belts and take advantage of new opportunities, such as those presented by generative AI, will find ways to succeed in this market.

 

Summary

Venture capital investment decreased 34% quarter over quarter. While headwinds continue to hurt the outlook, the market may finally be approaching a new normal, although a quick turnaround is not expected this year.

In the short term, founders should continue to refine their value proposition and focus on preserving cash. Despite these difficulties, this is still a good time to start a business.

Bloomberg reported (paywall) last year that “about 56% of North American-based investors said they expect to allocate capital to venture capital fund managers that invest significantly or exclusively in companies founded by women.”

 

 

Global Venture Capital Outlook: The Latest Trends

 

Global venture capital funding remains stable thanks to investments in startups focused on artificial intelligence, sustainability and the energy transition.

Global venture capital investment activity remained stable in the third quarter of 2023, as startups in artificial intelligence (AI), sustainability and energy transition (especially electric vehicle infrastructure) continued to attract substantial investments, which underlines its disruptive impact.

Overall, funding only decreased marginally, about 4% from the previous quarter.

In the UK, energy and transport startups were highly funded, contributing to 50% growth between Q2 and Q3 2023. Funding in China also grew, albeit at a more modest 9%, due to an influx of investments in semiconductors and startups focused on sustainability.

Sustainability startups, along with artificial intelligence startups, have also helped maintain investor interest in the United States, even as the country continues to grapple with high interest rates and inflation.

Meanwhile, India is facing its third consecutive quarter of decline after a 35% drop, but the recent funding of fintech and electric vehicle startups in the market is a ray of hope.

Several high-value deals, particularly in biotech and pharma, led to spikes in average deal sizes for seed and early-stage financing, of 29% and 10% quarter over quarter, respectively.

The average late-stage deal size remained stable in the third quarter.

Existing corporate venture capital (CVC) investors remain active, taking advantage of lower valuations and hot topics such as artificial intelligence, sustainability and the energy transition, although with less intensity than previous quarters.

Companies are more reluctant to launch CVCs, as the number of new CVCs fell from 14 to 6, reaching the lowest point in more than three years.

Early-stage startups offer a degree of insulation from the current climate compared to their later-stage counterparts because these startups are not expected to go through the IPO process anytime soon

 

 

HBS sounds dull: the current state of venture capital

 

HBS students and faculty share their thoughts on the venture capital space and advice for students looking to join or start a fund.

 

The venture capital (VC) landscape has changed dramatically over the last year

According to Kroll, while venture capital funds in the United States have $300 billion of uninvested capital, investor caution and fears of a recession are creating challenges for venture capital portfolio companies.

Funds are finding it difficult to exit their investments and companies are struggling to raise capital without accepting a “down round” – a decrease in valuation from a previous fundraising round.

The outlook for venture capital is an important topic for HBS students, given the popularity of jobs and internships and the reliance on venture capital for early-stage startups.

According to HBS employment data, 7% of students in the class of 2022 joined a venture capital fund after graduating, making it the fifth most popular career choice.

VC was also the fourth most popular internship choice for the class of 2023.

According to business administration senior lecturer Jeffrey Bussgang (BA ’91 MBA ’95), the number of students entering VC has increased in recent years, but has decreased this year due to the market environment.

“Every year I track how many HBS graduates get jobs at VC,” Professor Bussgang said. “From 2015 to 2018 it was around 20, from 2019 to 2022 it jumped to 40, but for the Class of 2023 I estimate it went back down to 20-25, and I think that number will remain the same for the Class of 2024.”

Harbus spoke with HBS students and faculty with experience in the venture capital space to get their thoughts on current opportunities and challenges facing the industry, as well as advice for current students looking to pursue careers in venture capital or launch their own funds.

The most important thing investors can do right now is to spend time doing in-person due diligence to truly understand the founders as deeply as possible, incorporate ESG principles into their investment strategies

 

 

VC Current Status

The current venture capital environment is closely tied to the state of the technology sector, including large public companies and early-stage startups.

In late 2020 and early 2021, once Covid-19-related lockdowns began to lift, the tech sector took off. Martyna Piotrowska (MBA), who worked at a venture capital fund between 2021 and 2023, explained that there was a huge boom in the sector due to pent-up demand, and technology companies took advantage of this momentum by raising significant amounts of capital.

This boom led many funds to ignore the typical red flags that appeared during due diligence, and funds that had little experience in venture capital (e.g., hedge funds, crossover funds) began to enter the space to participate in the action.

«People were prioritizing growth over profitability, and investors were very focused on a company’s revenue and marketing efforts,» Piotrowska explained. «All the companies were trying to raise money because there was a lot of money going around.»

 

Professor Bussgang, who also serves as general partner and co-founder of Flybridge Capital Partners, noted that 2021 was an anomaly in the world of venture capital.

Before the pandemic, the total value of venture capital deals ranged between $100 billion and $150 billion a year in the United States. In 2021, more than $300 billion in deal activity was seen, which was a record.

Exit opportunities for venture capital funds, including IPOs or direct sales, also peaked in 2021 at $800 billion.

However, starting at the end of 2022, the picture began to change. According to Professor Bussgang, exit opportunities plummeted to $100 billion in 2022. In the first six months of 2021, there were 631 tech company IPOs with total revenue of $149 billion. In the first half of 2022, that metric fell ~50% to 328 IPOs and $37 billion in proceeds, and in the first half of 2023, there were only 124 IPOs and $14 billion in exit proceeds.

Devon Gethers (MBA), who launched an early-stage venture capital fund called Meridian Ventures this year, explained that the weakness of the public market has resulted in reduced valuations for private companies in funding rounds.

Excluding companies focused on artificial intelligence and machine learning, average valuations of early-stage companies have fallen below Q4 2020 levels.

This has a ripple effect on limited partners (LPs), as Harvard Management Company CEO N.P. Narvekar noted in his annual letter that venture capital funds should downgrade his holdings. These reductions, in turn, will affect the declared value of the endowment.

Jeffrey Grabow is EY’s US venture capital leader. He says VC dollars slowed in Q2 2023, but there are signs of life in seed activity

 

There are several factors explaining the slowdown in the world of technology and venture capital.

Piotrowska explained that the US Federal Reserve’s decision to raise interest rates is an important factor. With higher interest rates, institutional investors and other limited partners (LPs) can earn higher rates of return on safer investments, such as government bonds and other debt instruments. This raises the bar for venture capital funds as they have to demonstrate their ability to outperform these safer investment options.

Additionally, higher rates have made it more difficult for companies to obtain loans, particularly impacting growth-stage companies that cannot access public debt markets.

Gethers added that many LPs are having to deal with reduced liquidity and the «denominator effect,» meaning stock market declines have caused investors to be overexposed to private investments, and several investors are reducing their commitments to venture capital and private equity (PE) funds to rebalance their portfolio

It is important to note that the slowdown does not affect all venture capital funds in the same way

Josh Lerner (PhD ’92), Jacob H. Schiff Professor of Investment Banking, noted that funds focused on Seed (early stage) and Series A investments have been less affected than later stage (Series B/C) funds. .

He explained that in 2021, later-stage funds made more aggressive investments and boosted valuations. “The big guys have raised huge funds for later stages,” Professor Lerner said, referring to the established mega venture capital funds.

«We are now seeing a reckoning in growth and later-stage venture funds, which is impacting more established groups.»

One such fund, Tiger Global, which previously had little experience in venture capital, recently had to write down the value of its venture investments it made in 2021 by 33%. The drop in valuations in 2022 has mainly affected later-stage companies, and the increase in fund size has now made it more difficult for funds to find viable opportunities that require larger investments.

Professor Lerner also noted that the crisis has been tough on first-time venture capitalists, as they have found it difficult to raise new funding or additional capital compared to mega funds.

 

Short-term outlook

Despite the negative sentiment in the venture capital space, there is room for optimism in the next 6 to 12 months.

Manuel Franck (MBA) noted that short-term opportunities are promising in early-stage venture capital funds. Franck, who served as chief of staff for a venture capital-backed startup in Argentina, explained that while the average value of Series A investment rounds has decreased, this has allowed funds to evaluate a broader set of companies. and invest in those with high return potential.

The previous investment frenzy displaced first-time, early-stage venture capital funds in favor of funds that could write larger checks, while the current environment is benefiting those who had been on the sidelines.

Gethers added that companies are also changing their strategy in this reduced valuation environment by offering investments in the form of securities that delay establishing a valuation until a later financing round.

Series A: Normally in this round, the amount invested is higher than in the seed round and is used to hire employees and start generating income. Normally the objective of those who contribute capital in this round is to sell said participation in the future, thus obtaining a high profitability

 

 

Professor Lerner is optimistic in the short term, noting that in the last 6 to 9 months there has already been a recovery in public markets

He also explained that the importance of technology in our daily lives makes the recovery of VCs even more likely.

“Technology is much more important in today’s economy and represents a larger proportion of innovation spending,” he said.

«Artificial intelligence is a classic example of where we are seeing strong investment activity and innovation.»

Lerner also noted that rising rates could provide a silver lining for venture capital funds, as companies are more likely to seek venture capital financing as the debt market has become more challenging.

Piotrowska explained that there is also a practical consideration that points to a near-term revival in the venture capital space. Companies that raised funds in 2021 at elevated valuations are starting to run out of cash and will need to return to the public or private markets to continue funding their operations.

«Companies can’t extend their runway forever, but we will see some dips,» she said, referring to companies raising capital at a lower valuation than previous rounds.

He also noted that investors will be much more diligent this time in evaluating companies, putting greater emphasis on profitability metrics (gross margins, EBITDA growth) compared to growth metrics (revenue growth, advertising spend).

Tips for students

Overall, everyone who spoke with Harbus agreed that venture capital remains an attractive industry for those looking to get involved with investments in innovative companies.

However, there are a few things people should keep in mind when evaluating which funds they would like to join. According to Professor Lerner, those looking to join a fund should research the fund’s past investment history.

“Hiring and funding will be handled by the venture capitalists with the strongest track records,” he said, adding that new funds will have a tougher time compared to more established funds. Additionally, he recommended students evaluate specialized venture capital funds, such as those that focus exclusively on AI, climate science, or fintech, rather than more generalist funds.

«Specialized funds have done substantially better than generalist funds, and their depth of knowledge outperforms the generalist approach,» he explained.

 

 Piotrowska noted that it will be a long time before space returns to the high activity of 2021

A significant reduction in interest rates and higher macroeconomic growth are needed to reach these levels.

She agreed that mega funds and funds that avoided the investment frenzy in the later stages will be in a stronger position in the near term.

Franck explained that recent months have resulted in a “flight to safety” of investment capital from emerging economies back to the United States. He noted that there are investment opportunities and promising entrepreneurs in emerging markets, particularly in Latin America and Africa, but in the coming years in the long term, investor interest will focus on developed countries. “LatAm has many industries ripe for disruption, particularly in financial services,” he said.

For those interested in launching their own funds, Gethers noted that it is a difficult path, but students can be successful by doing extensive research on the fund’s strategy, investment stage and industry focus. “Do your research and talk to people to understand what the job is like,” she said. «Starting a fund requires significant preparation and risk tolerance: you need a network to raise capital, a narrative to convince investors, and access to solid deal flow.»

Venture capital will continue to be an area of interest for HBS students in the future, and the macroeconomic outlook along with the resilience of funds will determine the contours of the next wave of investment.

Seed Rounds are the first rounds of financing for a company and precede the Series A. However, to reach the necessary state to raise a seed round, some startups raise a pre-seed

 

4 main trends in venture capital for 2024

For venture capital managers and investors, 2023 was a wild ride, and not necessarily in a good way.

We enter 2023 with disappointing venture capital deals, fundraising, and IPO numbers. Add to that the Silicon Valley Bank crisis and subsequent bank liquidity fears at the end of the first quarter, plus the investor caution that accompanied it, and it’s easy to see how ideal conditions never aligned for the equity industry. risk in 2023.

While this new year does not suggest a return to the record-breaking days of 2021, there are positive signs that venture capital activity is picking up modestly.

Notable quarter-over-quarter improvements in fundraising, deal volume, and valuations appear to be on the way, signaling a shift in venture capital trends.

These are the key trends in venture capital to watch as 2024 unfolds

#1: A funding rebound is coming

While venture capital has traditionally been associated with quick deals and breakneck investments, the landscape of the venture capital industry has changed in recent years. Factors such as market uncertainty, economic conditions and changing investor preferences are contributing to this trend.

According to CBInsights, 2023 VC funding in terms of value and number of deals will be significantly reduced compared to 2022: at the end of the third quarter, the value of deals was still less than half of what we saw in 2022.

However, the third quarter of 2023 also saw an 11% increase from the previous quarter, suggesting new momentum. And with a record $283 billion in venture capital dry powder in the US alone, according to SVB’s State of the Markets report, the new funding boost will be a welcome development.

Facing this slowdown, venture capital managers have been presented with both challenges and opportunities. It encourages a more selective and thoughtful approach to investment decisions, as both investors and companies reassess their strategies and focus on the quality of deals over quantity.

While the pace may be slower, this shift can lead to more informed and sustainable investments that ultimately benefit both startups and long-term investors. And if these late-2023 figures suggest anything, it looks like this slower, more measured market-mandated approach could be facilitating a steady climb.

Artificial intelligence (AI), particularly generative AI has marked one of the few bright spots in the venture capital space this year, as a driving force behind software’s leadership among sub-sectors

 

 

No. 2: Positive signs in Europe VC

A compelling narrative has been developing in Europe. While the overall venture capital market is grappling with unrest, Europe’s venture landscape is witnessing some promising fundraising activities.

Crunchbase data shows a 28% quarter-on-quarter increase in funding for European startups during the third quarter. Late-stage startups, in particular, are reaping the benefits.

In recent years, venture capital activity in Europe has continued to develop and remained resilient during the post-2021 recession, with 38% of venture capital outflows going to European startups, according to CB Insights , leading all other regions for four consecutive quarters. ‘

The continent’s startup ecosystem, once overshadowed by its Silicon Valley counterparts, is now thriving on innovation and entrepreneurship.

This growth is driven by a rise in promising technology companies emerging from cities such as Berlin, London, Stockholm and beyond, offering a wide range of disruptive solutions.

Late-stage startups may be raising funding today, but this increased activity is fostering a rich breeding ground for startups and bodes well for 2024 and beyond, creating a thriving ecosystem of tech talent and establishing Europe as a formidable player in global venture capital. landscape.

No. 3: AI enthusiasm drives overall VC funding

“In the United States, artificial intelligence and biotech startups continue to attract investor interest at all stages, particularly as economic headwinds appear to weaken. In fact, excluding the OpenAI and Stripe deals, US funding was up approximately 10% quarter over quarter.”

– Bain and company

The venture capital world is abuzz with excitement as AI startups take center stage. After all, we opened 2023 with a huge OpenAI deal worth $10 billion. OpenAI continued to generate buzz around AI with the widespread adoption of ChatGPT, generating followers from tech giants like Google and Bing.

This buzz shows no signs of stopping in 2024, and AI startups are capturing investors’ imaginations with their ability to leverage data, automation, and machine learning to solve complex problems. Whether healthcare, finance, autonomous vehicles or customer service, countless industries are feeling the pressure to prove they can improve efficiency by adopting AI into their operations now that real-world applications of AI abound. In 2024, the venture capital space will be eager to capitalize on that pressure.

A rebound in financing is coming. While venture capital has traditionally been associated with quick deals and breakneck investments, the landscape of the venture capital industry has changed in recent years. Factors such as market uncertainty, economic conditions and changing investor preferences are contributing to this trend

 

 

 No. 4: Signs of life in the IPO market

“With the recent uptick in IPO activity, there are glimmers of optimism for venture markets. “If all goes well and the broader macroeconomic and market context remains favorable, we expect a larger reopening in 2024.”

– JP Morgan

There are small but notable signs that initial public offerings (IPOs) could begin to regain momentum in 2024. After a period of relative moderation, IPO activity is slowly recovering in the venture capital space.

While valuations are low and the number of IPOs is drastically lower than what we have seen in recent years, certain venture capital-fueled companies are now reaching a stage of maturity where they are choosing to go public and achieve a healthy return, taking advantage of the opportunity to access. broader capital markets.

As KPMG notes, in the third quarter of 2023, AI chip maker Arm, grocery delivery company Instacart, and marketing automation company Klaviyo all opted to go public, a flurry of activity that caught the attention of the venture capital audience.

This revival of IPOs means growing confidence in the strength and potential of these companies. It’s not just about liquidity for investors, but also the promise of innovation and transformative technology reaching a broader audience.

This information has been prepared by OUR EDITORIAL STAFF