What goes up must come down, and like any other asset class, Venture Capital (VC) is not exempt from this.
Global VC financing was USD$74.9B in Q4 2023, down from an all time high of USD$211.1B in Q4 of 20211. Deal counts over the same period went from approximately 16K, down to 7.8K worldwide. Global median deal sizes are also down from their all-time highs1, apart from pre-seed and seed portfolio companies.
It’s clear that the VC market activity in late 2020 and early 2022 was an exceptional period; however, we’re entering a more normalized period now. There is less of a focus from VC investors on growth at all costs, there’s an ever-present focus on gross margins, and there’s an increased pressure to shorten the timeline to portfolio company breakeven.
The NASDAQ has recovered from its 2022 lows and is at an all-time high. Predictably, a bounce back has been slower on the private capital side, with deal count in the US VC market, for example, being at 13,608 deals in 2023, comparable to the 2019 deal count of 13,6372. Moreover, the exit count for US VC was 1,129 in 2023, the lowest in the past five years2. These drops indicate that we are much closer to the bottom of the venture capital market, or it may even be behind us. In either scenario, there’s good reason for optimism going forward.
Despite declining trends in Global VC investment, funds raised, and deal valuations, the future of this dynamic industry seems promising. Over the last fifty years, venture capital has been the principal financing source for many of the biggest tech businesses in the world, including Intel, Alibaba, Google, LinkedIn and Facebook, amongst others. So, what are the bright spots and what is in store for Global VC in 2024?
A broad view – what is the outlook for venture capital in 2024?
Much like the 2001 Dot.com mania, valuations in 2021 became blurred, and some portfolio companies did not grow into them. Capital raised during 2021 started running out in 2023, which in turn caused an increase in bankruptcies3, and has the potential to continue into 2024. It wasn’t uncommon to see portfolio companies raising multiple financing rounds in 2021 and building up their capital base given the increased supply of capital. At that time, there was a high amount of liquidity in the markets due to Quantitative Easing, general geopolitical stability, and an exceptionally strong exit environment driven by Special Purpose Acquisition Company (SPAC) and Initial Public Offering (IPO) activity.
While there will be exceptions, the direction of travel for VC from here will likely be driven by macroeconomic factors in the near term, combined with confidence in the economy. For 2024 to be a turnaround year for VC investing, we would need to see inflation continue to dampen, central bank interest rates fall, and employment rates to remain historically low – a soft landing for the global economy. Furthermore, a significant reduction of geopolitical risks would be favorable for VC investing in Europe and the Middle East. IPO and Mergers and Acquisitions (M&A) activity also needs to bounce back to give confidence as it relates to the exit landscape and liquidity.
After the Dot.com bubble and the Global Financial Crisis, it took roughly three to four years for IPO activity in the US to recover back to just over half of the IPOs prior to those bubbles bursting4. However, Global M&A activity didn’t suffer nearly as much as the IPO markets at the time in terms of transaction volume5. Currently, US Nonfinancial Corporate Business Cash (counting checkable deposits and currency) is hovering around all-time highs of $2T6, and in the UK, the same metric is at all-time high of approximately $815.684B9. As a result, a recovery in the exit environment would need to be M&A-driven due to this precedence and the high level of cash held by non-financial corporates.
Given the above factors which need to align, it seems unlikely that a surge in liquidity can be expected in 2024 to help drive exits, portfolio company financings, and higher valuations. In 2024, we might expect more of the same as 2023. A barbell in financing and valuation results is quite possible, with the proven portfolio companies finding fresh external financing on favorable terms or strategic acquisitions, and many of the others running out capital or taking on more investor-friendly terms.
Embracing opportunities – climate change, biopharma, machine learning and artificial intelligence
With climate change on many political leaders and investors’ minds across the globe, it’s no surprise that VC-backed investing into climate friendly initiatives (including plant-based foods, clean energy, and green transportation) is becoming a growth area.
As an example, VC-backed deals into nuclear fusion increased in 2023 and have been steadily increasing since 20187. December 2022 saw a technological breakthrough as the US National Ignition Facility created a nuclear reaction that generated more energy than it consumed. Another record in nuclear fusion energy generation was made by the UK-based JET laboratory in February 2024, and it is a space that’s heating up. Given this, along with the vast size of the energy market, and 2023 being the warmest year on record, there’s ample ground for seeing increased capital allocations in this space going forward.
Another focal point in the VC space is Biopharma, with exciting advances in gene editing therapy occurring, amongst others. In the US, Biopharma VC deal counts increased in late-stage portfolio companies from 200 in 2022, to 215 in 2023, with the median valuation moving from $50M to $60M over the same period2. With the hope of offering cures for genetic diseases, gene therapy fundraising has been more stable relative to other areas of Venture Capital investing, with a deal value of approximately $3.4B in 2023 – only a circa $300M drop from 20222. With ongoing technological breakthroughs, a large addressable market and aging populations globally, this is a space to keep an eye on with continued potential.
Lastly, Artificial Intelligence (AI) and Machine Learning (ML) are arguably the most pervasive technological shifts this generation has seen, with disruption happening largely in the horizontal and vertical application arena. In the US, deal values increased to $62.6B in 2023, from $54.4B in 20222. Both vertical and horizontal AI and ML technologies offer the ability to streamline costs, improve customer service, improve training, and offset labor shortages experienced in many developed countries. AI and ML had a stand-out year for fundraising at a time when capital is getting more expensive. Additionally, the International Data Corporation (IDC) forecasts that the worldwide AI software market will grow from $64B in 2022 to nearly $251B in 2027, or a Compound Annual Growth Rate (CAGR) of 31.4%8. With this stand-out year in the private markets, strong public market valuations, and the emerging market size, AI and ML should be an area that attracts increased amounts of capital for the foreseeable future.
Final thoughts
While 2023 was a year of calibration for Global Venture Capital, there is plenty of reason for sector-specific optimism and the forward-looking Venture Capital landscape more broadly. Venture Capital has provided outsized alpha generation opportunities over the past 50 years, and the Venture Capital ecosystem remains strong. As the exit environment, liquidity, and geopolitical conditions improve, Venture Capital can now take advantage of a renewed growth phase as the space embraces new opportunities.
1 – Source: Venture Pulse, Q4’23, Global Analysis of Venture Funding, KPMG Private Enterprise. *As of December 31, 2023. Data provided by PitchBook, January 17, 2024
2 – Source: Q4 2023 PitchBook NVCA Venture Monitor
4 – https://stockanalysis.com/ipos/statistics/
5 – https://www.statista.com/statistics/267368/number-of-mergers-and-acquisitions-worldwide-since-2005/
6 – https://fred.stlouisfed.org/series/NCBCDCA
7 – https://globalventuring.com/corporate/energy-and-natural-resources/investors-nuclear-fusion/
8 – https://www.idc.com/getdoc.jsp?containerId=prUS51345023
9 – https://www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/timeseries/nnzf/nbs
The views and opinions expressed herein are those of the respondents/authors and do not necessarily represent the views and opinions of KPMG LLP, Cayman Islands.
Dan Jones is a Partner in the Asset Management Group for KPMG in the Cayman Islands.
