Slow pace of distributions in VC is stifling fundraising activity
April 13, 2024
At the core of the venture ecosystem slowdown is a lack of exits, particularly large tech public listings.
In Q1, US VC exit value was just $18.4 billion including the IPOs of Reddit and Astera Labs, which accounted for approximately three-fourths of that total. (While these IPOs made splashes in the media, it is still early to say whether they signal a near-term re-warming of public listings.)
With a lackluster exit market over the past two years, many GPs struggled to convert paper gains to cash distributions to LPs. Many institutional investors encountered liquidity constraints amid a prolonged market correction.
With low DPI across the board, LPs couldn't recycle distributions as commitments to venture funds. We observed a continued slowdown in fundraising activity, with merely $9.3 billion worth of commitments secured across 100 venture funds.
In line with the market narrative last year, many VCs reportedly pushed back their next fundraising timeline, opting to focus on their existing portfolio while being very selective with new deals.
What does higher dealmaking momentum entail? We would first need to see more liquidity.
Despite a few stock market rallies we saw starting from late 2023, much of the gains were driven by the Magnificent Seven, hopes around interest rate cutting, and AI enthusiasm. We have yet to see a meaningful rebound across the board from the public side.
With hotter-than-expected inflation figures from the most recent quarter, it is unlikely for the Fed to start cutting rates till the second half of 2024. And even when rates do start to go down, a question mark surrounds the magnitude and pace of those cuts.
Changes in interest rates impact the valuations of public companies, the likes of which are closely monitored by late- and venture-growth-stage startups preparing to go public.
Historically, M&A accounts for the bulk of exit count. With a heightened need for liquidity across the cap table, a gradual convergence on pricing from a founder and investor perspective, an increase in inquisitive actions from strategic buyers such as corporations and PE firms, as well as sector-specific tailwinds, we expect to see an uptick in acquisitions in the coming quarters.
For more data and analysis, download our Q1 2024 PitchBook-NVCA Venture Monitor.
In Q1, US VC exit value was just $18.4 billion including the IPOs of Reddit and Astera Labs, which accounted for approximately three-fourths of that total. (While these IPOs made splashes in the media, it is still early to say whether they signal a near-term re-warming of public listings.)
With a lackluster exit market over the past two years, many GPs struggled to convert paper gains to cash distributions to LPs. Many institutional investors encountered liquidity constraints amid a prolonged market correction.
With low DPI across the board, LPs couldn't recycle distributions as commitments to venture funds. We observed a continued slowdown in fundraising activity, with merely $9.3 billion worth of commitments secured across 100 venture funds.
In line with the market narrative last year, many VCs reportedly pushed back their next fundraising timeline, opting to focus on their existing portfolio while being very selective with new deals.
What does higher dealmaking momentum entail? We would first need to see more liquidity.
Despite a few stock market rallies we saw starting from late 2023, much of the gains were driven by the Magnificent Seven, hopes around interest rate cutting, and AI enthusiasm. We have yet to see a meaningful rebound across the board from the public side.
With hotter-than-expected inflation figures from the most recent quarter, it is unlikely for the Fed to start cutting rates till the second half of 2024. And even when rates do start to go down, a question mark surrounds the magnitude and pace of those cuts.
Changes in interest rates impact the valuations of public companies, the likes of which are closely monitored by late- and venture-growth-stage startups preparing to go public.
Historically, M&A accounts for the bulk of exit count. With a heightened need for liquidity across the cap table, a gradual convergence on pricing from a founder and investor perspective, an increase in inquisitive actions from strategic buyers such as corporations and PE firms, as well as sector-specific tailwinds, we expect to see an uptick in acquisitions in the coming quarters.
For more data and analysis, download our Q1 2024 PitchBook-NVCA Venture Monitor.
Kaidi Gao
Analyst, Venture Capital
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