Many startups hope that the gradual opening of an IPO window and the prospect of interest rate cuts later this year will finally encourage venture capitalists to be less stingy with their capital.
But the task of fundraising for startups is unlikely to get much easier any time soon, mainly due to venture capitalists' own challenges in raising capital.
In the first quarter, U.S. venture capital funds raised just $9.3 billion, according to tone book data. At this rate, venture capital fundraising will end 2024 at just over $37 billion, the lowest capital raised since 2013 and a 54% decline from last year.
Like startups, venture capitalists are struggling to attract new capital from their sponsors, known as limited partners, such as endowments, foundations and pension funds. The drastic decline in IPO and M&A activity in recent years meant that LPs had scant cash distributions from their investments in venture capital funds.
“We're coming out of a period from 2020 to 2021 where (LPs) were afraid of missing out and were quick to take risks,” said Kirsten Morin, co-head of venture capital at HighVista Strategies, an asset manager that invests in venture funds. “Now they're licking their wounds and saying, 'Oh no, I invested at the top of the market.' It will be a while before I see any distribution.'”
Other limited partners say they will be extremely cautious with their investments until startup IPOs ramp up sharply. reddit'sand Astera Laboratories successful deals are not enough to get LPs excited about the venture again.
Brand-name companies will continue to raise funds, but they may have less capital to invest in startups than in the past. Take IVP as an example. The 43-year-old venture firm closed a $1.6 billion fund last month, a decline of more than 11% from the $1.8 billion vehicle it raised in 2021.
But attracting new capital from LPs won't be as easy for smaller, newer venture firms. “I think a lot of people could leave the business in the next few years,” said Chris Douvos, CEO of Ahoy Capitalthat invests in funds and startups.
While this isn't great news for existing startups, it's not all doom and gloom either. PitchBook estimates that dry powder, the amount of VC capital they have yet to invest from previous funds, remains high.
However, that amount will decline unless LPs reopen their coffers.
“A weak fundraising quarter isn't going to make or break the future of venture capital,” said Kyle Stanford, principal venture capital analyst at PitchBook. “But if this continues, it will be a blow to the negotiation.”
