No End in Sight for Venture Capital Struggles

The stock market may be rebounding amid buoyant talk of a soft landing for the economy and good corporate earnings in 2024’s first half. But no one is smiling about any such turnaround for venture capital, which, after all, traffics in a very risky part of the business world: startup companies.

Venture investors face big obstacles, most prominently a still-moribund initial public offering market, thus choking off a favorite exit. Relatively high interest rates are among the factors that erode VC’s once-formidable popularity. No one has a handle on when this wretched condition will improve.

In fact, a spate of notable failures among VC-backed companies has rattled investors. “More startups that raised capital at record rates in 2021 and 1H 2022 will continue to struggle getting follow-on investments and could potentially fold,” warned Jessica Rabe, co-founder of DataTrek Research, in a report.

Recently, two unicorns (private businesses valued at over $1 billion) suffered noteworthy flameouts: trucking company Convoy, whose early investors included Amazon founder Jeff Bezos, and health-care-claims software maker Olive AI. Before they went out of business, they both were valued at around $4 billion and had raised almost $1 billion in funding.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Global venture funding totaled $21 billion in October, down 24% year over year and 13% lower than the 2023 monthly average of $24 billion, DataTrek noted, quoting Crunchbase statistics. Indeed, October 2023 funding—meaning what VC investors plug into young companies—was less than one-third the monthly totals during 2021’s peak months.

The situation has been lousy all year. DataTrek reported that global funding only totaled $221 billion in the year’s first three quarters, down 42% and 56% from the same periods in 2022 and 2021, respectively. The IPO picture is not encouraging. A mere 27 public offerings worth about $21.9 billion total occurred in Q3, better than Q2, but well below previous years’ tallies, according to PitchBook. The research firm commented that grocery delivery service Instacart and digital marketing outfit Klaviyo “went public at reduced valuations compared with their last VC rounds, signaling caution for high-growth yet unprofitable startups.”

Another bad sign: So-called down rounds have increased. This is when a VC-backed company scrambles to raise capital by pricing equity at less than it did in previous VC fundraisings. In this year’s third quarter, the amount of down rounds as a share of all fundraising rose to a 10-year high of 17.2%, up from 13.5% in Q2 and 9.3% in Q1, PitchBook data show.

Is there any good news about VC? Some, and it is concentrated in artificial intelligence, a hot ticket lately. Alphabet’s Google, for example, last month announced it would invest up to $2 billion in OpenAI rival Anthropic, consisting of $500 million upfront and $1.5 billion over time. AI and health care startups raised the most funding in October, with nearly $5 billion invested in each.

What is needed to reverse VC’s ill fortune? In the view of DataTrek’s Rabe, “Ultimately, it will likely take a batch of successful venture-backed IPOs and more clarity on the macro front for VC funding to start trending higher.”