After a rough run for startups, the venture market is edging back up—slowly but surely.
Whether you chalk it up to AI or a clearer economic outlook, the landscape is improving for venture-backed companies that a year ago were feeling the squeeze from investors. More players, like asset managers, are returning to the marketplace as startups begin to see a friendlier dealmaking environment. Falling US interest rates have also buoyed investor hopes for a more robust exit market ahead.
These three charts spotlight the improving outlook for startups, according to PitchBook data.
After a sharp snap toward an investor’s market in 2022, the PitchBook VC Dealmaking Indicator now indicates a more even playing field for VCs and startups. The indicator quantifies how investor- or startup-friendly the capital-raising environment is.
The shifting momentum has been driven in part by more capital becoming available for startups, particularly AI companies.
“Today we see a more balanced market,” said Jonah Midanik, general partner at Forum Ventures. “Still, VCs have less capital to deploy, which gives them a degree of power, but startups continue to hold their own—this push and pull dynamic is ultimately a positive sign.”
For startups, the supply of investor cash finally appears to be catching up with demand. After skyrocketing a year ago, the ratio of capital demand to supply is cooling across all stages after an evening-out period.
For AI companies in particular, more capital supply appears to be on the way following large fundraises like Salesforce’s new $500 million AI fund and Magnetar Capital’s $235 million AI ventures vehicle.
On the demand front, startups have adapted to leaner times. and fewer new companies are entering the market.
“Companies need to go back to the basics,” said Vignesh Ravikumar, partner at Sierra Ventures. “Focus on the fundamentals: build a strong team, efficient growth and a compelling vision.”
Median valuation step-ups have mostly plateaued after freefalling, a sign of stabilization as investors regain confidence and startups see more healthy, realistic growth.
Despite strong growth in AI valuations, prices have largely stagnated across the VC landscape. The proportion of flat and down rounds have reached the highest level in a decade, accounting for 28.4% of all deals in Q2 2024, according to PitchBook’s Q2 2024 US VC Valuations Report. Though valuation step-ups at the venture growth and early stages ticked up, startups and investors are being more guarded.
“The market is pushing companies to be leaner and more disciplined,” said Eli Promisel, a principal at Silicon Foundry, an advisory firm to startups and corporations. “The market is cautious. Investors are in control and founders must navigate with a focus on sustainable growth.”
Featured image by Chole Ladwig/PitchBook
