Venture capital market to seek new floor in 2024

The decline of mega-round financing, AI's growing influence, and the prospect of public markets

Mega-round financing declined as venture capitalists continue to be reluctant to write big checks in the current market. Only 50 mega deals were recorded in Q4 and 228 in total for 2023, the lowest total since 2017². We expect to see continued discipline by investors in the realm of mega-rounds. And we would not be surprised to see a downward trend toward $50 million checks becoming the “new” mega-round norm vs. checks over $100 million . However, AI will continue to dominate mega-round activity given the heightened interest and deep investment required for large language models (LLMs).

We are keeping a watchful eye on public market activity. With a significant backlog of venture-backed companies looking for liquidity, we would not be surprised to see a shift toward securing growth financing via public vs. private markets if US IPO market activity picks up in 2024.

Top three sectors continue to be IT, healthcare, and business & financial services

Information technology, health care and business and financial services continued to rank as the top three sectors, though health care surpassed IT in number of mega-round deals. Overall, IT comprised 30% of all deals in Q4 2023, mainly driven by two large AI deals of more than $1 billion. Quarter over quarter, however, the entire IT sector was off by 21%, while business and financial services declined 37%.

Energy continues to show promising signs, and while consumer goods had one large deal over $1 billion, consumer services remains flat. For the quarter, the top three subsectors were software, biopharmaceuticals and renewable energy, while financial institutions and services dropped out.

San Francisco leads as the top region in Q4

The San Francisco Bay area continued to rank as the top region in Q4, followed by Boston, which surpassed New York by dollar volume based on the strength of a $1.8 billion deal for a company developing fusion energy technology. New York dropped to third with a lack of large deals. Los Angeles remained in fourth in terms of dollar volume. For the first time since 2011, the annual deal counts in the Bay Area fell below 2,000. The region continues to be a significant source of VC activity, however, accounting for three of the top 10 deals last quarter. Deal activity was diversified among regions last quarter, with unusual contenders Nashville and Phoenix emerging to record top 10 deals.

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Overall outlook

Heading into 2024, the conditions for raising venture capital will continue to be challenging. We expect we will see many companies compete to fundraise in 2024. There are a large number of companies in the pipeline that haven’t raised since 2021 and will need to raise more capital. VC firms have prioritized their portfolio companies and are starting to do new deals.

In what could be a positive sign for the future, however, corporate investors signalled they may be planning to ramp up their activity in the corporate venture capital space. In a recent EY pulse survey, 93% of CEOs said they plan to increase (70%) or maintain (23%) investment in corporate venture capital funds in 2024, which expands the pool of capital and could lead to an off ramp through mergers and acquisitions.

The massive upcycle that fueled the venture capital market in recent years has made entrepreneurship appear easy. It’s not — and certainly isn’t getting easier. Investors are taking time to get to know the founders, their markets and plans for the future. That said, great companies with resilient entrepreneurs and clear paths to growth and profitability will continue to find a way forward.

Tips for entrepreneurs navigating fundraising in this environment:

With no immediate rebound in sight, founders will need to shift gears and focus on taking care of themselves and their teams. Provide the right level of emotional support. It’s a marathon, not a sprint, and that requires physical and mental stamina to compete in a crowded market and in challenging times.
Be open to different views on valuations. Markets may have changed significantly since you last raised a round of capital. Don’t let that get in the way of raising a round, doing a strategic deal or anything that allows you to fight another day.
Continue to seek out solid advice and counsel from investors, board members and fellow entrepreneurs.

Despite the challenges of the past two years, this is not the end of entrepreneurship. But as the ecosystem works through a down cycle, which we haven’t seen in some time, those entrepreneurs who are prepared to do the hard work of managing their capital carefully and building a profitable, resilient company will be the ones who distinguish themselves, attract investment and ultimately succeed.