Venture Capital Market Searching for Fireworks

Jina Yoon | Chief Alternative Investment Strategist

Last Updated:

Additional content provided by Michael McClain, CFA, AVP, Research.

As we approach the 4th of July, one area of the private markets that is in dire need of a spark remains the venture capital industry.  Since the 2022 collapse in fundraising and significant downward adjustments to valuations, new deal activity and exits have been stagnant with eight straight quarterly declines in deal volume, as of the end of the first quarter of 2024. While the years leading up to 2022 saw unprecedented and rather unsustainable capital inflows, the recovery remains tepid and hindered by interest rates staying higher for longer and large institutional investors hesitant to commit new capital or even recycle what limited capital is being returned as investment distributions. Per Pitchbook, only 32 new unicorn investments were minted during the first quarter, well below the 579 created during 2021, on an annualized basis. The number of down or flat investment valuation rounds also reached a 10-year high during the first quarter at 27.4% of all deals.  

So, while the recent environment has been undeniably difficult, looking ahead and as investors adapt to this new investment backdrop, we do note areas of resilience and future growth that may stimulate the broader industry. Specifically, defense and cybersecurity, energy technology, and generative artificial intelligence (AI). As cyber threats have become increasingly complex, startups are looking to build partnerships with the government or large defense contractors as a long term and consistent source of revenue, while the Infrastructure Investment and Jobs Act has supported growth in new energy and infrastructure technology. While AI’s long-term impact will be immense across industries, as is the case with any theme attracting outsized interest, caution is warranted to avoid getting caught up in the animal spirits of an emerging technology. 

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Jina Yoon

Jina Yoon is LPL Financial’s Chief Alternative Investment Strategist. Her investment career includes over 15 years of experience.