VCs and their portfolio companies took a bruising in 2023. From Silicon Valley Bank collapsing—and with it a vital lifeline for startups—to a frozen IPO environment closing off exit activity, this past year was one of the most challenging to date.
In response, investors pulled back, leading to chilling effects on the startup market, the latest PitchBook-NVCA Venture Monitor shows. As more investors opted to sit out 2023, companies contended with less favorable deals.
These four charts highlight the effects of the investor exodus.
Crossover investors, which participate in both public and private markets, have pulled back from the VC landscape more than other kinds of nontraditional investors. They participated in 1,046 US VC rounds in 2023, a 50% decline from 2022.
Several factors have soured this group on startups. High interest rates have reduced their appetite for riskier investments. Public equities have performed strongly, and a shortage of IPOs means that crossover investors’ VC portfolios are locked up.
The continued absence of crossover investors means that late-stage and growth startups will face intense competition for private capital as they run out of cash runway.
Less competition among investors has put pressure on valuations, leading to a dramatic fall in new unicorn companies, valued at $1 billion or more. Some 225 new unicorns emerged in 2023, the lowest number since 2019.
Of note though, according to the PitchBook-NVCA Venture Monitor, is the share of unicorns that are AI and machine learning companies. That group reached a record high, accounting for 44.4% of all new unicorns.
VCs are depending on the more than 720 active US unicorns for returns once the IPO market reopens. But it is likely that many of these companies won’t be able to go public or raise more private capital—one reason why PitchBook analysts expect the number of active US unicorns to decline in 2024.
Despite valuation pressure over the last two years, prices for startups generally remain higher than they were in 2020 for most stages. The big exception is the venture growth stage, where the median valuation fell 64% from 2021 and was even below 2019 levels at $143.5 million.
The drop in valuations means more mature startups are having to raise down rounds, taking less than favorable deals in a bid to survive. This trend will likely continue in 2024 as startups that put off fundraising in 2023 are forced to return to the market.
For the second straight year, VCs took in more cash from LPs than they returned in the form of distributions. That is despite a sharp drop in fundraising and speaks to the difficulty that GPs have had in liquidating their investments. This trend indicates a prolonged period of challenging fundraising in 2024 as LPs wait to see returns before allocating cash to new funds.
With LPs hitting the brakes on market participation and contributions to VC plummeting to an eight-year low, it could also signal diminished interest in generalist investing, with more of a hunger for specialized funds for areas like AI.
Related read: Q4 2023 PitchBook-NVCA Venture Monitor
Featured image by Mike Hill/Getty Images
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