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Venture Capital in the Third Quarter of 2024

By January 12, 2025Commentary

The National Venture Capital Association has released its third-quarter report for 2024.  I have explained the venture capital cycle several times and noted that the critical part is to have good exits from investments that allow the investors to then put the returned money back into new investments.  For at least the last couple of years, exits have been poor and not a lot of money is being returned to investors.  The primary methods for exit are taking a company public or selling it to another company.  In the third quarter both of those continued to occur at very low levels.  There were only 14 public listings in the quarter and the total exit value was only $10.4 billion for the entire quarter.  The gap between distributions to investors and new capital calls, remains very large.

As a result, the number of investors has declined sharply.  Fewer financings are occurring and many of those are follow-on investments done by existing investors.  Unlike early in the epidemic, companies looking for money are seeing low valuations and other investor-friendly terms.  Fortunately, because so many venture capital and private equity firms had raised large funds three to four years ago, there is a lot of capital still available to invest.  But the firms are themselves having difficulty in raising additional capital and attracting new investors, so they will be cautious with the capital commitments they currently have.

Overall, this is a difficult environment for startups and smaller growth companies that rely on venture funding.  Not even AI hype can rescue the overall decline in activity.  The sheer number of companies that started over the last five years means a lot of competition to keep getting funding.  The harder environment may also mean better returns for investors in the long run, as many of businesses funded in the past had crazy valuations and poor business models.

VCs were hoping for lower interest rates, but that obviously isn’t happening, so I anticipate continued low levels of activity in 2025, not withstanding optimism about the new administration.  That may actually exacerbate some issues, like deficits, interest rates and trade.  California continues, for reasons, or lack of reasons, that would mystify any rational person, to be the source of the bulk of the funding rounds.  For health care, life sciences funding rounds declined, average deal size increased and investment was mostly directed to companies further along the growth path.     (NVCA Report)

 

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