After two years of record-setting fundraising activity, U.S. venture capital funding has pumped the brakes.
U.S. VCs raised just $42.7 billion through the first three quarters of 2023, well off the pace of last year's record of $172.5 billion, according to venture capital data firm PitchBook. This year is on pace to see the least amount of venture capital raised in the U.S. since 2017, when investors brought in just $46.5 billion.
One reason for the decline? A lack of exits. The dearth of tech initial public offerings over the past 18 months has resulted in fewer wins for VCs, and a slowdown in dealmaking at the later stages.
"Slow fundraising is in large part due to exit markets returning little in the way of gains back to VCs and LPs," said Kyle Stanford, PitchBook's VC analyst, in a statement.
Last quarter, there were nearly 300 startup exits totaling $35.8 billion in cumulative exit value, according to PitchBook. That was the most exit value seen in a quarter since Q4 2021, but PitchBook notes over half of that exit value came from the two IPOs of Klaviyo and Instacart. Those public offerings may be a signal that the IPO window is opening for the tech industry, but the values of both Klaviyo and Instacart are now less than when they raised their last round of venture capital funding.
"Despite being profitable, these companies experienced notable valuation cuts compared to their previous private funding rounds, raising concerns about the challenges facing unprofitable or growth-focused tech unicorns in the public markets," Stanford said.
Outside of IPOs, acquisition deal value increased from the second quarter of 2022 but was still "historically low," PitchBook said, adding quarterly deal count in Q3 was the lowest in over a decade.
The amount of VC money flowing to startups also declined last quarter, with U.S. startups raising just $32.7 billion, the lowest since Q2 of 2018. The weak exit market is also to blame here, PitchBook says, particularly for later-stage startups. On the year, startups have raised $121.9 billion, less than half of what startups raised in 2022.
"The pullback from large institutional investors that have been vital to supporting companies late in their venture lifecycle has made it increasingly difficult for deals to get done, let alone the large-sized deals that many companies need," Stanford said.
