The Current State of Startup Fundraising: VCs Struggle to Obtain Capital
It’s a common hope among startups that with an increasing IPO window and the potential for interest rate reductions in the near future, venture capitalists will become more generous with their funding. However, this may not be the case as VCs are facing their own challenges when it comes to obtaining capital. According to PitchBook data, U.S. VC funds only raised $9.3 billion in Q1, a significant decline from the previous year.
“We’re coming out of a 2020 to 2021 period when [LPs] had the fear of missing out and were rushing into venture…Now they are licking their wounds and saying, ‘Oh, no, I invested at the top of the market. It will be a while before I see any distributions.’” -Kirsten Morin, co-head of venture capital at HighVista Strategies
Just like startups, VCs are struggling to attract new capital from their limited partners (LPs), including endowments, foundations, and pension funds. The decrease in IPO and M&A activity has resulted in low cash distributions for LPs from their investments in VC funds, leaving them cautious about investing in venture capital again.
While brand-name firms may still have success in raising funds, they may not have as much capital to invest in startups as they have in the past. For example, IVP recently closed a $1.6 billion fund, which is an 11% decrease from their previous vehicle. However, it may be even more challenging for smaller and newer venture firms to obtain new capital.
“I think a lot of people may fall out of the business over the next few years.” -Chris Douvos, managing director at Ahoy Capital
Although this may not be great news for existing startups, there is a glimmer of hope. PitchBook notes that there is still a high amount of dry powder (capital available for investment) among VCs from previous funds. However, if LPs do not increase their investments, this amount will eventually decrease.
The Future of VC: A Balancing Act
“One low fundraising quarter is not going to make or break the future of VC. But if this continues, it will be a hit on deal making.” -Kyle Stanford, lead venture capital analyst at PitchBook
In summary, the current state of VC funding is a delicate balancing act. With LPs hesitant to invest and VCs struggling to refill their coffers, startups may continue to face challenges in their fundraising efforts. However, with a promising amount of dry powder still available, there is potential for the tide to turn in the future. Only time will tell how this will impact the world of venture capital.
