Earlier this month, AI market-leader OpenAI made headlines with a $6.6B capital raise. Structured as a convertible note, this raise may either show a return to a vibrant venture market like 2020-2021 or signal the peak of a frothy AI funding environment. While the large AI fundraisings have been making headlines throughout 2024, it is helpful to pull out of the aperture to determine the health of the venture market.
A Declining Market: Key VC Trends in 2024
According to the PitchBook-NVCA Venture Monitor, VCs have invested $37.5B though Q3 2024. This is a 17% reduction in allocation year over year and a 34% reduction from Q2 to Q3. The number of active investors has decreased 25% year over year and if the trendline continues, this will be the second consecutive year that the total VC fundraising is less than half of 2021 or 2022.
The 2024 numbers may seem dire, but they seem much worse if you take out the outsized AI rounds and fundings by mega-funds such as Andreessen Horwitz who raised $7.2B earlier this year. In 2024, the VC market is both smaller and has a clear delineation between the haves and have nots.
Impact of Past Investments on the Current VC Environment
The reasons the VC market has flagged despite record closes in the public market and strong economic growth are well documented. Allocators continue to have large holdings in 2015-2020 vintage funds that hold companies that once achieved high valuations and now have limited avenues to exit at any valuation. We’ve seen strong IPOs this year, but with much of the oxygen in the public markets going to a handful of giant firms there’s not much demand for smaller firms whose growth may have slowed after private fundings dried up.
The question facing market participants is what triggers a change in this market. A return to lower interest rates may help at the margins, but it does appear we’ll be back at ZIRP any time soon. A strong public market may lure successful firms to float public offerings, but even at 4x the current rate of public offerings it would take decades to clear the market of private unicorns.
Looking Ahead: Embracing Opportunities in the Evolving VC Landscape
The bear case is that 2021 marked a peak and that there’s now a generational shift away from the venture funding model and towards funding going towards lower risk growth capital programs. While there’s certainly a case to be made for that thesis, it is likely we’re in an extended hangover period and we can’t quite see what the next impetus for increased VC activity will be. The lion share of AI funding is going to a handful of firms right now, but we’ll likely (and are starting to) see smaller rounds closed for firms that utilize the platforms for more specialized applications. An increase in geopolitical instability may return Silicon Valley to its defense contractor roots. Further anti-trust actions may break up the tech behemoths and create more competition in markets dominated by the large incumbents. The one thing we do know is that it is impossible to accurately predict what this market will look like in two years and all we can do is stay flexible as it continues to evolve.
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This article is written by Loren Heger. Mr. Heger serves as the Chief Compliance Officer and Managing Principal of FNEX Capital’s FINRA Member Broker/Dealer. He specializes in secondary transactions of late stage, venture-backed companies. He has facilitated institutional transactions of shares in companies such as Lyft, Pinterest, Palantir and SpaceX. He holds FINRA Series 82, 63 and 24 licenses.
Reference
Pitchbook – https://pitchbook.com/data
