After a long positive run, venture capital enters 2024 buffeted by crosswinds.
The market has become choppier due to global pandemic aftershocks, including supply chain disruption, rising inflation, and workplace and productivity changes from remote work adoption.
Though the U.S. economy appears to be headed for a “soft landing,” where restrictive monetary policy slows inflation and job growth without leading to unemployment spikes, the belt-tightening steps businesses took in anticipation of a widely predicted recession are squeezing the venture capital industry.
Because of those challenges, venture-backed startups failed at a record rate in 2023, a winnowing that comes after 15 years of pronounced growth for the industry, according to data from the National Venture Capital Association analyzed by Flippa. Venture capital funds are holding historic amounts of what is called “dry powder,” or the amount of money VCs have raised but haven’t invested yet, creating opportunities for entrepreneurs with compelling ideas and go-to-market strategies and the investors willing to stake them.
A venture capital fund pools the funds of investors to take high-risk and high-reward private equity stakes in startups and small to medium-sized companies with high potential for growth.
Within that broad definition, there are a number of variations. For instance, a fund can be put toward multiple financing rounds at various companies. Firms can have multiple funds under management. And larger funds are naturally able to do larger rounds of financing.
It can be an exciting, high-risk, high-reward opportunity.
With rising interest rates on loans, venture capital has become a more attractive funding option for startups. That creates new opportunities for founders, investors, and skilled workers in in-demand industries interested in working for groundbreaking startups. Venture capital is different from other kinds of funding that might be available to early-stage companies. Unlike a loan, venture capital isn’t repaid. Instead the investor receives equity shares, with the hope they will multiply (considerably) in value. In exchange for this high rate of return, the investor also takes a high risk that the company will fail and they’ll never get their investment back.
PitchBook predicts an increase in venture capital deal activity for 2024 over the year prior, but in a more cautious and investor-friendly way. Expect strong startups with strong ideas, teams, and go-to-market strategies to find ready funding, while startups that aren’t as fit will fall behind. Startup accelerators will also take a stronger role, nurturing budding founders and sharpening their strategies before they enter the new fray.