US Venture Capital Markets Impacted By Relatively High Inflation and Interest Rates in H1 2024 – Report

PitchBook has provided their 2024 US Venture Capital Outlook as part of a comprehensive  Midyear Update. Expectations for the turnaround in the VC market entering 2024 were not especially high, the research-focused firm noted in a recent update.

PitchBook pointed out that the headwinds that triggered the market slowdown were “well entrenched in the economy, and balance had not been found to offset the heightened risks.”

PitchBook also mentioned that through the first six months of 2024, inflation continued “to be sticky, interest rates remained at the high level they ended 2023 with, and geopolitical events kept a haze on the horizon.”

PitchBook revealed in its extensive update that venture has unsurprisingly been slow. Overall exits have “been poor, despite several high-visibility IPOs.”

Fundraising had one of “the slowest quarters since 2017 in Q1, and Q2 has been a struggle even though several name-brand VCs raised billions of dollars.”

Dealmaking has leaned heavily on AI, which continues “to make headlines with high valuations and large deals.”

There does seem to “be a higher degree of desperation from the market.” The PitchBook analysts further noted that with “more than 55,000 companies currently VC-backed, many companies are facing last-ditch options for continuing growth and development.”

The report added that many of the M&A exit transactions they have collected in 2024 are small, even to the size “that transaction values have gone unreported.”

Down rounds continue to “pick up as well, as companies concede with investors to secure funding.”

Venture market resets take time.

As stated in the PitchBook update, valuations remain relatively high, especially “for AI companies, and the aggregate value of unicorns is higher than ever.”

However, one of the consequences of “the slowdown now adding excessive pressure to the market is the lack of returns.”

PitchBook data shows that the rate of distributions “back to LPs is at its lowest since 2009.”

The market is exponentially “larger than it was back then, making the exposure of the LP community to VC that much higher.” With fewer returns and less capital to recycle into the market, the “full impact of the slowdown may still be ahead.”

As mentioned in the update, the Federal Reserve (the Fed) has yet to raise rates since July 2023, “reinforcing expectations that the central bank has concluded its current cycle of rate hikes.”

The researchers observed:

“Continued slowed inflation is even more likely, given that many supply chain bottlenecks brought about by the global COVID-19 pandemic appear to be largely resolved. There exists a correlation between supply chains and inflation, as evidenced in the Global Supply Chain Pressure Index; as of October 2023, the index has fallen significantly from its highest-ever peak in December 2021.”

They added:

“Market volatility is also on a downward trend, as reflected in the Cboe Volatility Index (VIX), commonly known as Wall Street’s fear gauge. Presently, the VIX stands at around 13, below its long-term median of 18 and significantly lower than the peaks witnessed over the past 18 months—like the 37.52 recorded in March 2022.”

PitchBook also mentioned that on the investor side, lower volatility “reduces the perceived risks associated with IPO investments by minimizing concerns about sudden and adverse market swings, thus potentially encouraging even more participation.”

PitchBook added that it would “be difficult to say the IPO market has reopened or even to call the activity in H1 a slight opening of a window.”

Four large tech IPOs were completed “for about $17 billion in exit value, but four is a small number.”

Just 22 companies have completed IPOs through May (at the time of writing), so the big question to answer is “why?”

To start, inflation has remained “above the Fed’s 2% target.”

This has tanked the “idea of a high number of rate cuts this year that would, theoretically, boost the market.”

Now, the expectation for the number of cuts has “lowered and been pushed back.”

The researchers also shared:

“With the exit environment remaining largely closed in 2023, the rate at which capital is being distributed, as a portion of fund net asset value, is at the lowest level since 2003. One of the major reasons for the poor distribution has been a lack of tech IPOs. Public listings generated above 15.4% of the yearly public exits in 2021 but dropped to 5.8% and 8.4% in 2022 and 2023 YTD, respectively, as public market investors have shied away from riskier tech bets.”

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