Tech

The startup fundraising squeeze could persist as VCs struggle to refill their own coffers

Many startups are hoping that the gradual opening of an IPO window and the prospect of interest rate cuts later this year will finally encourage VCs to be less stingy with their capital.

But the job of fundraising for startups is unlikely to get much easier in the near future, mainly because of the difficulties faced by venture capitalists.

In the first quarter, U.S. venture capital funds raised just $9.3 billion, according to PitchBook data. At this rate, venture capital fundraising will end 2024 at just over $37 billion, the lowest capital raised since 2013 and a 54% decline from last year.

Much like startups, venture capital firms struggle to attract new capital from their backers, called limited partners, such as endowments, foundations and pension funds. The drastic decline in IPO and M&A activity over the past two years has meant that LPs have received meager cash distributions from their investments in venture capital funds.

“We’re coming out of a 2020 to 2021 period where (LPs) were afraid of missing out and were rushing toward risk,” said Kirsten Morin, co-head of venture capital at HighVista Strategies, an asset manager that invests in venture capital funds. “Now they’re licking their wounds and saying, ‘Oh, no, I invested at the top of the market.’ It will be a while before I see any distributions.

Other limited partners say they will be extremely cautious in their investments until startup IPOs pick up significantly. Reddit‘sand Astera Laboratories successful offers are not enough to make LPs want to venture back.

Branded companies will continue to raise money, but they may have less capital to invest in startups than in the past. Take IVP, for example. The 43-year-old venture capital firm closed a $1.6 billion fund last month, down more than 11% from the $1.8 billion vehicle it raised in 2021 .

But attracting new capital from limited partnerships won’t be as easy for smaller, newer venture capital firms. “I think a lot of people could move out of the industry over the next few years,” said Chris Douvos, managing director of Ahoy Capital, which invests in funds and startups.

While this isn’t good news for existing startups, it’s not all doom and gloom either. PitchBook estimates that the amount of capital VCs still need to invest from previous funds remains high.

However, this amount will decrease unless LPs open their vaults again.

“One weak fundraising quarter is not going to make or break the future of venture capital,” said Kyle Stanford, senior venture analyst at PitchBook. “But if this continues, it will have an impact on getting deals done.”

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