The horror, the horror

Venture funds managed to raise just $15bn worldwide in Q1, a 53% decrease from about $32bn in the same quarter a year earlier.

Expert analysis by Lawrence Aragon

VCs: May we please have $234 billion even though we haven’t invested the $300 billion-plus you already committed to us and we’re not sure when we are going to exit our previous investments?

LPs: Heck no!

That was the scenario going through my head when I saw the results of our Q1 fundraising report. Venture funds closed on just $15 billion, a 53 percent decrease from the same quarter a year earlier and the lowest quarterly total since Q3 of 2017.

If the trend continues, VCs are on track to raise about $60 billion for all of 2024, which would be the lowest annual total since 2014, when venture funds worldwide collected about $59 billion.

Honestly, it is hard to see how VC firms can argue to their LPs that they really need fresh capital in a market where dealmaking remains slow, exits are few and far between and they are sitting on a massive amount of dry powder.

Dealmaking remained stalled in Q1. VC deal volume declined for the eighth straight quarter and hit a seven-year low in Q1, according to CB Insights. Just 6,238 venture deals were completed in the first quarter, down from 6,673 in Q4 and nearly 9,000 in Q1 2023. While the overall dollar amount ($58.4 billion) increased slightly from Q4, the spike was primarily due to Amazon's $2.75 billion investment in Anthropic. Compared to Q1 of last year and Q1 2022, the total is down 21 percent and 62 percent, respectively, CB Insights reported.

Meanwhile, VCs continue to have trouble exiting their existing investments. There were a couple of bright spots in the IPOs of Reddit and Astera Labs, which had a combined exit value of $11.4 billion, but overall exit values remain low, according to a Q1 analysis by Alan Wink, a managing director at accounting and consulting firm EisnerAmper. He noted that just $6 billion of the $18.4 billion in Q1 exit values was due to M&A.

“The lack of exits has especially hurt the unicorn companies and their investors,” Wink wrote. “At the end of Q1 2024, there were 731 unicorn companies with a total valuation exceeding $2.4 trillion. These unicorns have been held within VC portfolios for an average of more than eight years, which is much longer than the typical portfolio company holding period. This exceedingly long holding period increases liquidity risk for all investors.”

Without regular distributions from venture funds, LPs are finding themselves hard pressed to commit to new funds. Moreover, VCs are still sitting on a ton of dry powder – about $317 billion as of the end of Q1, according to Wink. “This record amount of dry powder is the direct result of record fundraising in 2021 and 2022 and the slowdown in capital deployment over the past several quarters,” he said. “In fact, about 72 percent of the dry powder is from 2020-22 vintage funds.”

Despite all of these factors, VC funds are in the market seeking $234.4 billion.

Until the exit markets open up and distributions start to flow back to LPs, I expect fundraising to continue to be a major challenge.

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