TLDR: Brace Yourself, Start-ups: VC Investments May Hit a 5-Year Low in 2024
After years of raising over $100 billion annually, start-ups seeking funding from venture capital firms may have to prepare themselves for the worst thanks to increasingly challenging market conditions. An EY analysis noted that in 2023, venture firms invested $140 billion in portfolio companies. In every year since 2018, venture-backed portfolio companies have raised more than $100 billion. Venture funding started to slide in 2022, along with the rest of the economy, after a heady few years of fast-paced capital raising. That trend continued in 2023: Just $23 billion was deployed in the fourth quarter, which was 23 percent lower than the third quarter, according to EY. Deal count dropped too — venture firms invested in just 2,000 companies in the fourth quarter, the lowest since 2012.
Key Points:
- EY predicts less than $20 billion will be deployed in the venture capital markets in the first quarter of 2024
- Investments in venture-backed portfolio companies have been declining since 2022
- In 2023, only $23 billion was deployed in the fourth quarter, a 23% decrease from the third quarter
- Deal count also dropped, with venture firms investing in just 2,000 companies, the lowest since 2012
Analysis:
EY predicts that the venture capital market will experience a significant decline in investments in 2024. Start-ups should be prepared for challenging market conditions as the amount of funding available decreases. Despite venture firms investing over $100 billion annually in portfolio companies since 2018, the trend started to decline in 2022 and continued to do so in 2023. In the fourth quarter of 2023, only $23 billion was deployed, a decrease of 23% compared to the third quarter. Additionally, deal count dropped to the lowest level since 2012. With over 50,000 venture-backed startups in the United States, the competition for capital is fierce, and not all companies are able to secure funding.
Start-ups have been finding alternatives to overcome the lack of capital. Some have implemented cost-cutting measures such as layoffs, narrowing their focus, or outsourcing certain functions to reduce costs. Others have changed their payment models, asking customers to pay upfront for services rather than on a monthly basis. However, raising capital in 2024 is expected to be more challenging compared to previous years. EY predicts that the first quarter of 2024 may see less than $20 billion deployed in the venture markets.
Despite the decline in overall investments, there are still areas that remain attractive to investors, particularly companies with an artificial intelligence (AI) angle. Many companies are pivoting towards AI as the market demand increases. However, overall, investors are expected to exhibit more caution in 2024 compared to the frenetic pace of previous years.
It is important for start-ups to be prepared for the potential decrease in available funding and adjust their strategies accordingly. While raising capital may be more challenging, a focus on AI and demonstrating the potential for innovation and growth can still attract investor interest.
