Key Points:
- In 2024, there will be a shake-out in venture capital as investors realize that they will struggle to raise new funds and see a distant time horizon to liquidity.
- Record amounts of dry powder, or unallocated capital, will put downward pressure on returns as investors chase deals.
- There is uncertainty surrounding the impact of large language models (LLMs) and whether there is enough market demand to justify investment in the sector.
- Managing bias will be of critical importance in 2024, as increased uncertainty in markets and geopolitical friction could exacerbate bias in the field.
- There will be a drop in “bridge” rounds in 2024, meaning more cash will be available for new startups.
- 2024 will be a banner year for tech mergers and acquisitions, as startups struggling to fundraise may opt to sell, while larger tech companies will look to acquire customers and expand their offerings.
- There will be an increase in VC secondaries driven by a need for liquidity, and a corresponding re-setting of price expectations in the market.
- VC fundraising is expected to rebound in 2024, though it may not reach the highs of previous years.
- Next-gen family office leadership, especially millennials, will champion greater venture capital activity in 2024 and beyond.
- New managers starting VC firms will increasingly come from existing brands rather than primarily operating backgrounds, creating competitive pressure on established investors.
- Specialist VCs who can select well and pay attention to entry prices will shine in 2024, as capital allocation to VC decreases.
- VC firms that are heavily entrenched or specialized will be most appealing to LPs looking to make new commitments in the turbulent market.
- The best-performing VC firms will generate the majority of returns, highlighting the importance of manager selection.
The stock market is coming back and interest rates are poised to come down, yet the picture feels less rosy in tech. More so than in past years, the tech ecosystem feels at odds with the macro environment: the tech IPO window remains largely shut, investors face liquidity crunches and many startups are struggling to raise capital.
The question on everyone’s mind is what is in store for 2024? I spoke with leading venture capitalists (VCs), investors in VC firms (called Limited Partners, or LPs) and other experts for their perspectives. They gave me their thoughts on what the fundraising environment will be in the new year, what LPs will be looking for in new commitments, what the VC secondaries market will look like and whether AI is an opportunity or overhyped.
The most striking takeaway was actually the conflicting opinions and lack of consensus about what will happen in 2024. Will it be a good year for VC? Is the tech rebound just lagging the public markets, or are there more stormy seas ahead?
#1: We will see the great VC resignation
“We are starting to see the great [VC] resignation, as many investors realize that they won’t be able to raise new funds easily, and that the time horizon to liquidity is in the distant future. The better news is that this shake-out is actually healthy for the ecosystem, as too much money in the system contributed to the hype cycle in the first place.” — Jenny Fielding, Co-Founder and General Partner, Everywhere Ventures
#2: Record amounts of dry powder will put downward pressure on returns
“The rise in capital raised, and therefore left to deploy, was driven by the bull-run of VC returns between 2010 and 2015. Since 2015, venture capital dry powder has increased by 385%. In the period between 2010 and 2015, 1st quartile managers achieved >3.0x TVPI across in each vintage. In 2024, record amounts of dry powder, or committed but unallocated capital that firms have on hand, will put downward pressure on returns as investors chase deals in a bid to deploy capital.” — Sunaina Sinha, Global Head, Private Capital Advisory, Raymond James
#3: The hype around LLMs won’t last
“Paul Amara famously pinned Amara’s law, that we ‘overestimate the impact of new technology in the short term and underestimate it in the long term.’ The same is true for large language models (LLMs). Despite the incredible advancement in LLMs, it’s unclear if there’s enough market pull from enterprise organizations to justify all the dollars going into the sector. Expect many of these seed-stage startups to either fold or pivot into solving a more meaningful, less hype-y business problem.” — Ramy Adeeb, General Partner, 1984 Ventures
#4: 2024 will prove to be a year of critical importance for managing bias
…
#14: The best-performing VC firms will generate the lion’s share of returns
“Unless you can get access to the top-performing managers, LPs could be best served by avoiding venture capital. The best-performing VC firms will continue generating the lion’s share of returns for the asset class, highlighting the importance, and difficulty, of manager selection. Between 2010 and 2015, the average difference between top quartile and median funds was 1.23x, a much bigger difference than between median and 3rd quartile funds, 0.68x.” — Sunaina Sinha, Global Head, Private Capital Advisory, Raymond James
