Many startups are hoping that the gradual opening of the IPO window and the prospect of lower interest rates later this year will eventually encourage venture capitalists to be stingy with capital.
But it's unlikely that the startup funding challenge will get much easier any time soon, largely due to venture capitalists' own fundraising challenges.
U.S. VC funds raised just $9.3 billion in the first quarter, according to PitchBook data. At this pace, VC funding will end in 2024 with just over $37 billion, the lowest amount raised since 2013 and a 54% decrease from last year. .
Like startups, VCs struggle to raise new capital from supporters called limited partners, such as endowments, foundations, and pension funds. A significant decline in IPO and M&A activity over the past few years has meant that LPs have had poor cash distributions from their investments in VC funds.
“We are coming to the end of the 2020-2021 period. [LPs] Carsten Morin, co-head of venture capital at HiVista Strategies, an asset management firm that invests in venture funds, said: “Now they're licking their wounds and saying, 'Oh, no, I invested at the top of the market.' It takes a while for the handouts to show up.”
Other limited partners say they will be extremely cautious about investing until there is a significant increase in startup IPOs. The success of Reddit and Astera Labs' services isn't enough to get LPs excited about adventure again.
Branded companies will continue to raise money, but there may be less capital available to invest in startups than before. Consider IVP as an example. The 43-year-old venture firm closed a $1.6 billion fund last month, down more than 11% from the $1.8 billion it raised in 2021.
But for small, new ventures, attracting new capital from LPs may not be so easy. “A lot of people may be leaving the business over the next few years,” said Chris Duvos, managing director at Ahoy Capital, which invests in funds and startups.
This isn't good news for established startups, but the situation isn't all doom and gloom. PitchBook estimates that dry powder, the amount of capital that VCs still have to invest from previous funds, remains high.
However, that amount will decrease unless the LP opens the safe again.
“One low-funding quarter doesn't determine the future of VC,” said Kyle Stanford, principal venture capital analyst at PitchBook. “However, if this situation continues, it will hinder the completion of the deal.”