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Venture capitalists are struggling to raise money, signaling the end of the era of “mega funds” and a slowdown in startup deals over the coming years.
Globally, venture firms raised $30.4 billion from university endowments, foundations and other institutional investors in the first three months of this year, a notable slowdown from 2023 — which itself was the worst year for fundraising since 2016, according to private markets data provider Beachbook.
Investors in venture funds, known as limited partners, have reined in spending over the past two years, taking a more cautious approach as interest rates rise, startup exits including public listings and sales slow, and venture fund managers' returns decline. .
“Why has there been such a persistent slowdown? The crux of the problem is exits,” said Kaede Zhao, a venture capital analyst at PitchBook. A return to public offerings or initial sales would allow limited companies to recoup and recycle their invested capital.
“Unless we see meaningful improvements from the exit market, we expect fundraising difficulties to persist and this will impose downward pressure on deal closings,” Gao added.
Fundraising activity has slowed sharply since 2021, when venture capital firms raised $555 billion. Last year, they raised a third of that total, and activity has continued to slow, putting VCs on track for their worst fundraising year since 2015.
In the US, just $9.3 billion of capital was raised in the first three months of this year, roughly a tenth of the total capital raised in 2023.
“We want to be there for our partners, but we don't want to put ourselves in a hole,” said the chief investment officer of a major US institution. He noted that he and other limited partners have written ever-larger checks as the market has boomed but have yet to see a return because exit activity has stalled. “It's a difficult calculation for a lot of investors.”
The slow pace of fundraising is an ominous sign for startups, which rely on venture capital investment to grow in their early stages. This continues a sharp reversal in the fortunes of venture capital firms since 2021, when they spent a record $747.5 billion in 2021, according to PitchBook. This extravagance was made possible in large part by the rise of “mega funds” — vehicles worth between $5 billion and $10 billion that created a period of unprecedented exuberance for startups.
That era is now over, according to PitchBook: Q1 fundraising data “shows there may be no appetite for such tools in today’s market.”
Some of the biggest spenders in the boom years — including Tiger Global, Catio, SoftBank and Insight Partners — have reduced the size of their funds and slowed the pace of their investments.
Tiger closed its 16th fund last week, after receiving $2.2 billion in investor commitments. The firm's last fund was a $12.7 billion vehicle raised in 2021. Insight, which raised $20 billion in 2022, also scaled back its ambitions for its latest fund.
The chief investment officer said: “I would be very surprised if the industry did not shrink by half in five years. The returns are not there… The depth of the contraction is usually proportional to the size of the bubble, which is the implication that we are going through a difficult period.”
Venky Ganesan, a partner at Menlo Ventures in Silicon Valley, said venture capital firms are now betting that the boom in artificial intelligence will provide generational opportunity and help “overcome the sins of 2020-2022.” “Every venture company is chasing an AI unicorn. Some will get it and thrive, and those who don't will be consigned to the dustbin of history.”
Venture capital firms that raised big money before the market turned still had billions of dollars of “dry powder,” but they were reluctant to invest in startups whose valuations had been shaken by high interest rates.
They are increasingly focusing on helping companies already in their portfolios towards exits that would then allow VC firms to return capital to their limited partners.
A handful of successful public listings of venture-backed companies, including social media site Reddit and chip company Astera Labs last month, have raised hopes of a broader recovery for the U.S. IPO market. Rubrik, a data security startup, filed for an IPO earlier this week.
But Gao cautioned that it will take more than a handful of successful public appearances to get the market started.
“when [marketing automation software company] Clavio W [online grocery start-up] Instacart went public last September, and there has been a lot of excitement about rebooting IPOs, but there has been a lot of… [share price] “Volatility,” she said. “It's not just about a great IPO, we need to give it more time to see how the performance stabilizes.”
