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Last December, the outlook for venture capital felt grim. Compared to the flush days of 2021, startups were looking at a much drier funding landscape, as interest rate hikes came to present a sobering reality.
The situation was spelled out by Wesley Chan, co-founder and managing partner at FPV Ventures, who told Inc last December that limited partners, such as pension funds and university endowments that invest in VC funds, were spooked by the macro conditions: "Most LPs are saying, 'Why would I put more money into venture when I can get risk-free returns by buying treasuries at almost five and a half percent?'"
The VC pullback naturally has repercussions for founders and their employees. Many startups had to raise down rounds last year.
VCs may have traditionally seemed immune to market dynamics that throttle their portfolio companies, but Chan's words were a harbinger of things to come: Already in 2024, VCs are experiencing tough times, with job cuts and office closures. The investment fund Coatue, which capitalized heavily on the 2021 venture boom, closed its European headquarters in London earlier this month, as it grapples with a decline in its deal count. In 2021, Coatue closed 168 deals, but in 2023 the number dropped to 29, or a decrease of 82 percent, a Crunchbase analysis shows.
High profile departures have also hit Tiger Global, The Information reported this week, with several investor relations employees accepting buyout offers. Partners at Index Ventures including Mark Goldberg and Rexwoodbury departed, Business Insider reported earlier this month. The upheaval continues a trend from 2023, when Y Combinator laid off 17 employees last March, and OpenView cut the majority of its staff in December, according to the Information.
The difficulties reflect the record decline in VC's fundraising efforts: In 2023, VCs raised $57 billion--a 67 percent decline from 2022, when $172.5 billion was raised, according to Pitchbook and the National Venture Capital Association. Last year, 459 funds closed on funds, the lowest on record since 2013, the analysis found.
As some observers have noted, raising large funds doesn't always beget success. In fact, it can set some VCs up for failure. "In venture in particular, bigger is not better, better is better. And once you have a fund of a sufficient size, if it's much bigger than that, it gets statistically more and more difficult to generate great returns," Kevin Lalande, managing director at the VC fund Santé, told Institutional Investor in December.
Looking forward, the entire venture capital industry may face a reckoning. On the heels of its unprecedented growth over the last decade, it's possible that the space is just too saturated to sustain itself. "If you look at the industry as a whole, it's too big," Sheel Mohnot, general partner at Better Tomorrow Ventures, told Vice last summer. "The industry has to shrink...I just don't see where these returns are going to come from."
Of course, some prognosticators are hopeful that interest rate cuts could spark another wave of investment. Interest rates are supposedly primed to go down in 2024, as the Federal Reserve has hinted. But even so, investors may be more inclined to chase profitable companies, rather than growth at all costs.
The sector is undergoing "this transition from chasing growth, and trying to grow at all costs to actually investing behind the growth," Richard Dulude, co-founder and partner at Underscore VC told Inc earlier this month.
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VC Funding in 2024: High-Profile Departures, Layoffs and a Glut of Investors Struggling to Generate Returns
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28.01.2024
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Last December, the outlook for venture capital felt grim. Compared to the flush days of 2021, startups were looking at a much drier funding landscape, as interest rate hikes came to present a sobering reality.
The situation was spelled out by Wesley Chan, co-founder and managing partner at FPV Ventures, who told Inc last December that limited........
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