The venture capital funding crunch will continue in 2024, but it won't be as bad
- Many VCs are optimistic that the frosty conditions of the funding landscape will thaw this year.
- That spells hope for cash-crunched startups most likely to seek funding in the new year.
Everyone in the venture capital ecosystem hopes 2024 will be better than 2023 — another year of mass layoffs and sparse funding.
The past 18 months have been challenging for many, especially those who haven't experienced such extended economic fragility. We've witnessed startup after startup decide to hang up their cleats, thousands of workers get pink slips, and some VC firms show kinks in their armor.
But many VCs are optimistic that this year will, at the very least, be slightly better than the state of play in 2023. While startup funding is likely to remain muted, some believe the market will start to thaw next year.
"We anticipate that fundraising markets will open up in 2024 when compared to 2023, but it'll still be a challenging environment," said Marcos Fernandez, managing partner at Fiat Ventures.
Adding to that cautious optimism, analysts at PitchBook in their 2024 US Venture Capital Outlook report, foresee that 2024's funding environment will improve as more capital gets deployed to VC firms.
They predict VC fundraising "may be an increase on 2023 values, though it will remain well below 2022's peak." The fundraising landscape could resemble 2020's US VC trends, they said, which turned out to be a relatively good year for the industry, despite fears about the pandemic.
For startups, that means there's a scintilla of hope that readier access to funding becomes available, though the likely capital will remain limited and reserved for the cream of the crop.
"Startup founders may think that the worst is over, but we're not out of the woods just yet and that isn't going to immediately change in 2024," said Pegah Ebrahimi, a managing partner at FPV Ventures. "Startup founders should still practice caution."
She recommends that companies have a minimum of 12 months of runway, and start thinking about fundraising when that runway is in the 18-month range.
With so many companies seeking capital, some VCs expect a logjam in funding, particularly at the earlier funding stages. Many startups raised money during the boom times of 2021. With the average time between funding rounds around two years and shrinking, according to Carta data, that means runway is looking pretty slim for many startups heading into 2024.
"Venture capital funding at the earlier stages has been ultra competitive lately due to heightened scrutiny across the industry, and it's likely going to get even more so," said Brad Svrluga, cofounder and general partner at New York-based firm Primary. "Due to frosty funding conditions of the past year and a half, many startups that raised seed rounds in 2021 have held off on doing so, but will be forced to go back out and fundraise in 2024."
All things considered, this year will be pivotal for the venture capital ecosystem to recover from the doom and gloom of the past two years, and in some cases, come to terms with the harsh realities of the boom or bust startup lifecycle.
"It'll be a time to make the tough choices after a couple of years of fearing the shoes will drop," said Chuckie Reddy, a partner and head of growth at QED Investors. "While this will be the defensive piece of a VC's work, most are very hungry to go back on offense and will see some energy return to the market. It's been a brutal 18+ months for most that haven't experienced a downturn."