The beginning of 2024 brought slight optimism to the venture capital market, but it has not yet translated to “meaningful” growth in deal activity, according to a recent PitchBook report.
A persisting slowdown in venture capital deals continued into the first quarter with startups nationwide raising $36.6 billion, marking a 28% decrease from $51.6 billion raised in the prior year quarter, according to the Venture Monitor report, released Thursday by research firm PitchBook and the National Venture Capital Association.
“However, it would be a mistake to hyperfocus on the results of a single quarter whose results were a bit farther left on the bell curve than usual,” Bobby Franklin, president and CEO of the NVCA, wrote in PitchBook’s report. “The venture capital business cycle effectively reset in recent years, and as of early 2024, it still appears to be searching for its level.”
Arizona appears to be bucking the trend of a national venture capital slowdown as startups are continuing to build upon positive fundraising momentum during the first quarter.
Arizona startups inked 30 deals totaling $273.9 million in the first quarter, compared to 35 deals and $636.7 million raised in Q1 2023, according to the report.
It’s important to point out, however, Arizona’s Q1 2023 results included a $500 million debt and equity deal raised by Scottsdale-based unicorn company Lessen. When subtracting the Lessen transaction, Arizona’s first quarter venture capital deal value is $137 million more than the total in Q1 2023.
Phoenix-area startups secured 25 deals totaling $127.6 million in the first quarter, compared to 31 deals totaling $630 million in the same time period last year — or $130 million excluding the Lessen deal.
Companies in information technology, aerospace, defense, health care and fintech were among the state’s top investments in the first quarter.
Tucson-based battery technology company Sion Power Corp. raised the greatest amount of capital among Arizona startups in the first quarter with a $75 million series A round that closed in January.
Other notable Arizona deals in Q1 include:
- $70.7 million in a series D round for Tucson-based stratospheric balloon company World View
- $17.7 million in an early-stage round for Scottsdale-based Imagen Dental Partners
- $16.5 million in a late-stage round for Tempe-based LifeGuides
- $15 million in a series B extension round for Scottsdale-based ZayZoon
VC deals decline, market has plenty of dry powder
While 2024 is not expected to break records for investment activity, there’s tremendous potential “roiling beneath the surface of a relatively calm market,” Franklin said.
Despite low capital outflows, years of strong venture capital fundraising combined with a reduction in investments in recent quarters means the sector nationwide has more than enough capacity and is sitting on well over $300 billion in dry powder, according to PitchBook.
“Between an increasing number of mature portfolio companies and exceptional levels of dry powder, the market is not lacking in possibilities for exit or investment, but the sparks that reignite the market will probably be visible only in hindsight,” Franklin wrote in PitchBook's report.
PitchBook reported 891 late-stage investment deals totaling $19.1 billion nationwide in the first quarter, compared to $23 billion across 1,089 deals in the prior year quarter.
Pre-seed and seed investments saw a significant drop in deal count, contrasting with prior quarter trends in which activity held up “relatively robustly,” according to PitchBook.
Investors deployed $2.6 billion in pre-seed and seed capital across 789 deals nationwide in the first quarter, compared to $4.2 billion across 1,328 deals in Q1 2023.
Early-stage deal value reached $10.2 billion across 1,023 transactions nationwide in the first quarter, compared to $10.8 billion across 1,268 deals in Q1 2023.
Startup exits showed some positive momentum relative to recent quarters, due in part to successful initial public offerings of Reddit and Astera Labs — but are still considerably off pace from the highs seen in 2021. Last quarter saw $18 billion in exit value from startups, 73.4% of which came from those two IPOs, National Inno reported.
The U.S. VC-backed company count is now above 55,000 with late and venture growth stage figures doubling since 2018, highlighting competition for capital in an investor-friendly market.
Investors are becoming highly selective with deals, and some are making sure their most promising portfolio companies are positioned for success before making new bets. Investors are also increasingly adding downside protective terms — such as cumulative dividends and liquidity multiples — into term sheets, according to PitchBook.
"In contrast to the manic market of 2021, investors now have more choice," PitchBook wrote. "Benchmarks for deals have increased and stronger companies are able to compel investment, while struggling companies are likely facing final judgment."
