Venture Capital Status as of the End of 2024

As I always start these posts on venture capital, it is important to watch because it represents a very large portion of the economy and supposedly represents companies that are innovative and growing, so should be contributing disproportionately to the increased employment and more productivity in the economy.  The National Venture Capital Association estimates that some 54,000 companies have some venture or PE funding.  Of course the venture capital and private equity firms represented in the report are really only interested in making money, which is okay if they think they make money by delivering the best possible service or product at a reasonable price, but not all of them do have that approach.  (NVCA Report) (registration required)

The venture/private equity cycle runs as raise money from investors, usually institutions like pension funds or corporations or from rich individuals; invest the money in a company, which can range from a startup to a pretty large but still growing company; exit the investment, usually by selling the company or going public; return the exit proceeds to the investors and raise another fund along the way to make more investments.  Obviously the venture firms rely on the investors taking the exit proceeds and re-investing them in the new funds.

The venture world is impacted by general economic conditions and by specific factors like interest rates, since there is typically a fair amount of debt used in larger venture/PE deals.  Before and during the epidemic venture capital was a tear, with all kinds of excess capital floating around the system and very high exit prices being paid.  As interest rates have risen, and the rotten core of the economy has been exposed, the last year has been much tougher, which is reflected in the reports.   In the fourth quarter there were 3934 financing rounds of all types, down 28% from the year earlier, but the deal value took a more dramatic plunge at $171 billion, down $72 billion on a year-over-year basis.  The deal value drop would be even greater if you took out two very large AI funding rounds and AI was disproportionately represented across all levels of activity.

On the exit end, over the last year the multiples in the public market contracted substantially.  For a while companies were getting absurd valuations for sketchy product and revenue models, but 2023 has washed a lot of that excess away.  Since some funds were investing at very high values, it is harder for them to show any gain on the investment when valuations collapse.  But on the early stage end, this means that valuations are more favorable to the investing funds, setting up the possibility of better ultimate returns.  If you are interested in understanding the dynamics of this key part of the US economy, these reports are worth a full read.