Asset AllocationApril 15, 2024

Long-Lagging Venture Capital Shows Signs of Possible Turnaround

U.S. venture fund returns remain negative, but valuations are up and two recent high-profile VC-supported IPOs did well, a PitchBook report finds.

Reported by Larry Light

Higher interest rates, scant initial public offerings and negligible mergers and acquisitions are among the obstacles venture capital faces after a two-year stretch of sluggish returns and dealmaking. Yet there are glimmerings that things may at last be on the upswing, according to an analysis from research group PitchBook.

“U.S. venture fund returns remain negative, but are trending up once again, a hopeful sign,” the report stated. While the number of VC deals (deployment of capital to companies) has remained at a low ebb, the valuations of the companies have begun to rise, the study noted.

“Venture-backed startups surfaced an upward trajectory from the 2023 annual level across the venture lifecycle, despite the overarching slowdown in deal momentum,” it observed.

For instance, at the “venture growth” stage, which is two to four years of operation after the initial VC commitment, the median valuation figure rose 59% to $229.3 million in this year’s first quarter, from the year-before period, PitchBook found.

Two recent VC public offerings also have given investors heart. Astera Labs Inc., which makes chip-based products to aid cloud computing and artificial intelligence, went public March 20, and the market greeted it with enthusiasm, as its shares vaulted to $80 from $36, and then lost some altitude as they settled back to $74. Reddit Inc.’s stock debuted March 21 at $34, and promptly shot up $50, and then the online discussion network fell back to $40. Nonetheless, both companies still are still trading above their IPO prices.

Among allocators, VC often finds favor. A venture fund from B Capital Group recently got a $150 million investment from the New York Common Retirement Fund and $20 million from the New Mexico Educational Retirement Board.

Another positive is the record amount of uncommitted capital that VC funds hold—meaning that, when the time is right, they have the means to invest in myriad fledgling companies. This “dry powder” totaled $311.6 billion as of last year, double what they had just five years ago. The VC firms “are deploying capital at a slower pace,” the PitchBook report noted. “Many do not even need to fundraise.”

Meanwhile, the overall tempo of venture remains torpid, with dealmaking stuck at around the level it has occupied for the past two years. In this year’s first quarter, deals totaled $36.6 million. That is half the level of 2021’s first period.

PitchBook contended that the latest crop of deals is confined to the “highest-quality” companies, those with strong financials and clear positive prospects. The exit access has continued to be tight in 1Q 2024, with IPOs and M&A at a fraction of their volume in 2021.