VC Investors Face ‘Tough Math’ as Deal-Making Slows (2024)

FAQs

VC Investors Face ‘Tough Math’ as Deal-Making Slows? ›

“Why has there been such a sustained slowdown? At the core of the issue is exits,” Kaidi Gao, a venture capital analyst at PitchBook, told FT. “Unless we see meaningful improvements from the exit market, we're expecting fundraising difficulties to linger, and that will put downward pressure on deal-making.”

The numbers signal investors are concerned by slowing economies and elevated inflation, and the impact those are having on young companies. Global VC investment last year fell to the lowest since 2017, even as new technologies such as generative artificial intelligence attracted funding.

Challenges of Venture Capital Markets

One of the main challenges is that it can be difficult to identify promising investment opportunities. Many early-stage companies fail, and it can be difficult to distinguish between those that are likely to succeed and those that are not.

Limited transparency: VC firms often have limited transparency in terms of their investment strategies and portfolio performance. This can make it difficult for investors to assess the risk and potential return of their investments and can lead to mistrust and lack of confidence in the industry.

It may ebb and flow, but it will always be there as a strong demand. There will always be money to be raised. And yet, despite all that cash flowing into VC-backed companies, twenty-five to thirty percent of them will fail.

The decline in fundraising is also happening at a time when VC dry powder of $302.8 billion is at a record high. Most of this dry powder belongs to funds that were formed in 2021 and 2022.

Loss of control.

You could think of it as equity financing on steroids. With a large injection of cash and professional – and possibly aggressive – investors, it is likely that your VC partners will want to be involved. The size of their stake could determine how much say they have in shaping your company's direction.

Let's not invite that risk, and instead undertake conviction, compliance, confidence and consequences as an industry. It can not only help us preserve the best parts of the current industry, but also lead to better investments and a healthier innovation sector.

The 4 Ts Venture Playbook is a made by UBC for UBC founders, that focuses on building and developing the critical elements of a successful startup: Team, Technology, Traction and Treasury.

Peter Thiel in Zero to One: > The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.

Are VC funds risky? ›

Venture capital is a high-risk, high-reward type of investment, and there is no guarantee of success. While VC firms aim to identify the best opportunities and minimize risk, investing in startups and early-stage companies is inherently risky, and there is always the potential for loss of capital.

The capital in VC comes from affluent individuals, pension funds, endowments, insurance companies, and other entities that are willing to take higher risks for potentially higher rewards. This form of financing is distinct from traditional bank loans or public markets, focusing instead on long-term growth potential.

Unlike traditional finance jobs where a suit and tie can be mandatory — though that's been changing after the pandemic — venture capitalists have garnered a reputation for rocking Patagonia vests and Allbirds sneakers while networking with founders and limited partners.

Generally , venture capitalists and angel investors look for a return of at least 20 - 30 % on their investment , with some aiming for even higher returns of 40 - 50 % .

The average size of new, first time CVC funds in 2023 was $146 million, with a median fund size of $100 million.

As a general rule of thumb for startups, out of every 10, about three or four fail completely. The other three or four return their original VC investments, and only one or two will produce substantial returns.

Recent data indicates a persistent downturn in venture capital fundraising in the first quarter of 2024, as exit strategies become scarce, impacting fundraising initiatives.

Dropping to its lowest level in four years, the 2023 VC market saw a 35% year-over-year decrease from the declining VC investment levels of 2022. Overhang of more than 50,000 existing VC-backed startups continues to impact the investing landscape, which needs to sort out high valuations and low liquidity.

According to an outlook published by Wellington Management, distributions from VC funds dropped a staggering 84% from 2021 to 2023, further growing dry powder inventory and extending the allocation drought. Competition for fundraising will continue to be a trending theme among emerging companies in 2024.

Despite success stories (e.g., Google and Android or Apple and NeXT), corporate ventures often fail (e.g., Quibi or American Express's acquisition of Revolution Money) due to large organizations' inherent lack of agility in the face of innovation. Successful ventures require adaptation and embracing disruption.