US venture fund returns remain negative but are trending up once again, a hopeful sign for a struggling fundraising market after a sustained period of portfolio markdowns.
One-year rolling IRR bottomed out in Q4 2022 at -17.9% before rising to -9.1% in Q2 2023, according to the latest PitchBook-NVCA Venture Monitor.
The rolling internal rate of return is a pooled metric of US VC funds that tracks aggregated unrealized returns data. It entered the red in late 2022 for the first time since 2016 as tech valuations took a hammering.
Late-stage and growth-stage venture firms were particularly hard-hit by the downturn in valuations of comparable public companies in 2022, according to PitchBook venture capital analyst Kaidi Gao.
The tech-heavy Nasdaq composite rose 43% in 2023 and a further 9% in Q1 2024. The performance of a handful of mega-cap tech stocks like Microsoft, Alphabet and Nvidia drove much of that growth.
“We have not been seeing a meaningful rebound across the board. Rather, much of the recent gains were driven by the Magnificent Seven, AI enthusiasm and the prospect of interest rate cuts,” Gao said.
VCs commonly adjust their portfolio company valuations based on the revenue multiples of comparable public companies. There is a significant lag in fund reporting, so much of the positive performance of stock markets in recent quarters has yet to be factored into VC fund marks.
Funds that make adjustments based on public comps will likely be able to provide LPs with rosier return metrics in the 2024 fundraising cycle. Their paper marks will also be helped by the continued flurry of activity and ballooning valuations for companies in the generative AI space—though the durability of those robust valuations in the long-term remains to be seen.
The revival in public comps couldn’t come at a better time for GPs attempting to close a new fund. The median time to raise a US VC fund has stretched to 18 months, a decade high.
LPs are paying especially close attention to how much capital VCs are returning to LPs relative to commitments, referred to as distributed to paid-in capital. Cash distributions to LPs have lagged contributions, amounting to a net cash flow of -$54.8 billion from 2022 through H1 2023.
The IPOs of VC-backed companies Reddit and Astera Labs have raised hopes for cash returns, but overall VC exit value remains low.
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