What's in store for startups in 2024? An increase in public offerings, a renewed appetite from large corporations in startup investing and fewer active "unicorn" startups with billion-dollar valuations.
Those are some of the predictions for the startup and venture capital sector in a new report from Pitchbook, a venture-capital data firm. The past two years have seen a major pullback in startup investing, exits and deals since the highs of 2021, and Pitchbook's analysts say a "significant rebound" isn't likely in the near term, given stubbornly high interest rates, ongoing geopolitical tensions and the potential for a U.S. recession not out of the question.
But there are some reasons for optimism for startups in 2024, at least compared to the slowdown experienced over the past year.
Will IPOs return?
The initial public offering window remained firmly closed for much of 2023. Despite a sprinkling of public offerings from firms like Klaviyo and Instacart, startups largely opted to not test the public markets this year, which has 2023 on track to be the second-worst year in a decade for startup exits.
Through the first three quarter of 2023, total startup exit value hit just $51.5 billion, compared to $76.7 billion last year and a whopping $795 billion in 2021.
But there are positive signs that the IPO window is open, or opening soon, giving startups and their venture-capital backers incentive to take the plunge. The Federal Reserve hasn't raised interest rates since July, inflation has slowed and the S&P 500 is up 22% on the year, as of Dec. 21.
If inflation continues cooling and rates come down, it could create a less-risky environment for late-stage startup investors who see an IPO path for their investments.
Less market volatility "reduces the perceived risks" associated with IPO investments, Pitchbook's report said, thus "potentially encouraging even more participation" in public offerings.
So, who could be poised to break the IPO drought in 2024? Software startup ServiceTitan is reportedly planning a public offering next year after previously eyeing an IPO in 2022 before the market turned south. Other potential candidates include well-known tech firms like Reddit, SeatGeek and StubHub. Pitchbook estimates there's a backlog of 75 startups waiting to enter the public markets.
A slowing unicorn herd
There are 720 active unicorn startups valued at $1 billion or more in the U.S., according to Pitchbook, the highest number ever recorded. But the pace of new billion-dollar startups is slowing.
In North America, there have been 44 new unicorns minted in 2023, down from 195 last year and 360 in 2021. The pace of new unicorn growth in 2023 is set to hit a six-year low, Pitchbook said.
"The unmistakable discrepancy between public and private valuations has made investors more cautious of inflating valuations without supportive financial metrics," Pitchbook said.
As startup valuations come down from their 2021-level frenzy, and companies that previously raised at billion-dollar valuations are forced to raise down rounds, the number of unicorns could trend downward in 2024. Late 2023 has also seen an uptick in unicorns closing their doors entirely, as firms like freight startup Convoy and home-construction startup Veev have shut down after raising hundreds of millions in venture funding.
Will corporate venture capital return?
Since the second quarter of 2022, there's been a "sizable exodus" in nontraditional investors in startup deals, Pitchbook said. These type of investors, which include corporate venture capital, hedge funds and family offices, participated in around 3,500 U.S. startup deals so far in 2023, down from more than 5,900 in 2021, a 40% decline.
Corporate venture capital (CVC) investors specifically have seen a similar decline, with 1,500 CVCs participating in deals this year compared to almost 2,500 in 2021.
However, these investors could re-enter the venture ecosystem in 2024 if interest rates continue to stabilize or decline, according to Pitchbook. Declining rates and lower startup valuations could prove particularly attractive to CVCs, as the investing environment becomes less risky.
A rebound in corporate startup investing would be a welcome sign to startups that could be looking for new sources of capital amid the VC pullback. The number of active U.S. venture investors fell 38% in the first three quarters of 2023 compared to the same quarter last year, meaning 2,725 fewer firms made deals this year.
Beyond just sitting on the sidelines, some venture-capital firms are struggling to stay afloat. Boston-based VC firm OpenView Venture Partners told its limited partners this month it will be winding down operations just months after raising $570 million for its seventh fund.
Artificial intelligence has been, and will likely remain, an area of interest for CVCs, which are looking to incorporate the new technology into their businesses. Companies like Salesforce, Google and Citibank are pouring money into AI startups, as the sector remains among the few bright spots in the venture ecosystem.
Ultimately, startups are likely to feel more pain before things improve, with shutdowns and layoffs continuing in early 2024, according to Peter Walker, head of insights at cap-table management firm Carta. But a reopened IPO window and more investment at later-stage fundraising rounds could mean a rosier outlook for startups in 2024.