Venture Capital Activity in 2024 Second Quarter

I am a little behind in some areas.  I like to track venture capital activity as a proxy for the wider economy.  The National Venture Capital Association provides regular quarterly reports on the topic.  In the second quarter of this year, activity generally remains muted.  As I have explained before, the VC cycle starts with investment into funds, which then invest in startup and growing companies.  If and when these companies have the right growth and profit characteristics, they will go public or be sold.  During the epidemic, with the flood of liquidity, all parts of the cycle were overwrought, too much money went into too many funds and companies and exits were easy.  Companies had a lot of leverage in doing favorable deals.

All that changed as interest rates rose and the hype around a lot of the companies invested in during the epidemic dissipated, revealing how unreal their businesses were.  Exits dried up and new fundraising became harder.  And now the leverage on investments has swung back to the funds, leading to more realistic valuations, which should create the opportunity for larger returns.

In the meantime, the exit drought continues and the backlog of venture-backed companies increases.  Valuations for those exits that have occurred are relatively low.  All of this is creating a restive limited partner community–the institutions like pension funds and the wealthy individuals that start the whole process are not getting distributions from exits and therefore are reluctant to commit more money to new funds.  Fortunately, many companies got very large investments during the epidemic, and are being more frugal to ensure that the money lasts long enough to get them to self-sustaining profitability.

About $56 billion was invested across over 4200 deals in the second quarter, an increase in earlier quarters but still well below pre-epidemic trends.  But a few extremely large funding rounds obscure the true pattern.  VCs are being stingy with most companies.  A few companies with very good prospects are getting the vast bulk of early round dollars.  Life sciences companies had a nice rebound from several poor quarters of funding.  Artificial intelligence and software generally continue to be attractive to investors.  Only 14 venture-backed companies went public in the second quarter and they did not gnerally perform well.  Merger and acquisition activity in regard to venture-backed ccompanies also remained very slow.

All this suggests that while there is money available to fund innovation, it is being deployed slowly and the recycling process is still in a kind of limbo.  The broader economic effects of this dynamic will likely be seen in the next few quarters,  (NVCA Report)