The startup fundraising squeeze may persist as VCs battle to refill their very own coffers

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

Nevertheless it’s unlikely that startups’ fundraising slog will change into a lot simpler quickly, principally due to enterprise capitalists’ personal capital-gathering challenges.

In Q1, U.S. VC funds raised solely $9.3 billion, in keeping with PitchBook information. At this tempo, VC fundraising will finish 2024 at simply above $37 billion, the bottom capital raised since 2013 and a 54% decline from final yr.

Similar to startups, VCs are struggling to draw new capital from their backers, often known as restricted companions, reminiscent of endowments, foundations and pension funds. The drastic decline in IPO and M&A exercise over the past couple of years meant that LPs had meager money distributions from their investments in VC funds.

“We’re coming out of a 2020 to 2021 period when [LPs] had the fear of missing out and were rushing into venture,” mentioned Kirsten Morin, co-head of enterprise capital at HighVista Strategies, an asset supervisor that invests in enterprise funds. “Now they are 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.’”

Different restricted companions say that they are going to be extraordinarily cautious with their investments till startup IPOs decide up significantly. Reddit‘s and Astera Labs’s profitable choices aren’t almost sufficient to get LPs enthusiastic about enterprise once more.

Model-name companies will proceed to boost funds, however they could have much less capital to spend money on startups than they did up to now. Take IVP, for example. The 43-year-old enterprise agency closed a $1.6 billion fund final month, a greater than 11% lower from the $1.8 billion car it raised in 2021.  

However attracting new capital from LPs gained’t be as simple for smaller and newer enterprise companies. “I think a lot of people may fall out of the business over the next few years,” mentioned Chris Douvos, a managing director at Ahoy Capital, which invests in funds and startups. 

Whereas this isn’t nice information for current startups, it’s not all doom and gloom, both. PitchBook estimates that dry powder, the quantity of capital VCs nonetheless have to speculate from earlier funds, stays excessive.

Nevertheless, that quantity will dwindle except LPs open up their coffers once more.  

“One low fundraising quarter is not going to make or break the future of VC,” mentioned Kyle Stanford, lead enterprise capital analyst at PitchBook. “But if this continues, it will be a hit on deal making.”