Predictions for venture capital in 2024
The stock market is coming back and interest rates are poised to fall, but the picture is looking less rosy in tech. More than in years past, the tech ecosystem feels at odds with the macroeconomic environment: the tech IPO window remains largely closed, investors are struggling with liquidity, and many startups are struggling to raise capital. The question on everyone’s mind is what does 2024 have in store?
I spoke with top venture capitalists (VCs), investors in VC firms (called Limited Partners or LPs), and other experts for their perspectives. They gave me their thoughts on what the fundraising environment will be like in the new year, what LPs will be looking for in new commitments, what the secondary VC market will look like, and whether AI is an opportunity or overhyped.
The most striking element was actually the conflicting views and lack of consensus about what will happen in 2024. Will it be a good year for VC? Is the tech recovery just lagging public markets, or are there more stormy seas ahead?
#1: We will see the big VC resignation
“We are starting to see the great things [VC] resignation, as many investors realize that they will not be able to raise new capital easily and that the time horizon for liquidity is in the distant future. The best news is that this turmoil is actually healthy for the ecosystem, as too much money in the system contributed to the hype cycle in the first place.”
— Jenny Fielding, Co-Founder and General Partner, Everywhere Ventures
#2: Record amounts of dry dust will put downward pressure on returns
“The rise in capital raised, and therefore allowed to grow, came from rising VC returns between 2010 and 2015. Since 2015, venture capital dry powder has grown by 385%. In the period between 2010 and 2015, Q1 managers achieved >3.0x TVPI in each crop. In 2024, record amounts of dry powder, or committed but unallocated capital available to firms, will put downward pressure on yields as investors chase deals in an effort to deploy capital.”
— Sunaina Sinha, Global Head, Private Capital Advisory, Raymond James
#3: The hype surrounding LLMs won’t last
“Paul Amara famously defined Amara’s Law, that ‘we overestimate the impact of new technology in the short term and underestimate it in the long term.’
The same is true for large language models (LLM). Despite the incredible progress in LLMs, it is unclear whether there is enough market traction from business organizations to justify all the dollars going into the industry. You expect many of these startups to either fold or focus on solving a more substantive and less of a business problem.”
— Ramy Adeeb, General Partner, 1984 Ventures
#4: 2024 will prove to be a critical year for managing bias
“With forty countries going through election cycles, we expect increased market uncertainty and geopolitical friction to further exacerbate the bias in the field. In addition, the proliferation of AI will require significant advances in addressing bias in machine learning to ensure that industries of impact are accelerated with both speed of delivery and equity for diverse populations. Fund managers should be highly resilient and remain true to their strategies to address bias while ensuring optimal impact and returns.”
— Daryn Dodson, Managing Partner, Illumin Capital
#5: We’ll see a decline in “bridge” cycles in 2024, meaning more cash for new startups
“In 2024, the inside round (also known as a bridge or extension) will decline from 38% of all rounds to about 25%. 2023 was full of expansions, as investors poured extra cash into their current portfolio companies in hopes of helping them make it through to the next seed round. I expect VCs to be less generous to current portfolio companies next year — but hopefully that means more cash going into new companies.”
— Peter Walker, Head of Insights, Carta
#6: 2024 will be a banner year for tech M&A
“2024 will be a banner year for tech M&A. For startups struggling to raise funds due to high interest rates and VC valuation attention, divestitures will feel like the best — and most cost-effective — option.
Meanwhile, public and large private technology companies will be eager to leverage their strong balance sheets and access to vast amounts of capital to acquire inorganic customers, strengthen adjacent product offerings, and add key distribution channels and partnerships.”
—Jeremiah Gordon, General Counsel CapitalG
#7: Secondary VCs will increase. so will a realignment of price expectations
“Driven by the need for liquidity, we will see an increase in secondary VCs. We will also see the corresponding resetting of price expectations required for market-clearing trades.”
— Sunaina Sinha, Global Head, Private Capital Advisory, Raymond James
#8: Investors who are established in the ecosystem will have access to the best secondary opportunities
“For 2024, I strongly believe that despite the potential increase in secondary VC opportunities, it will really be the people who are entrenched in the ecosystem who will be able to access the best deals because of the disparity of information they have.
Transparency about the real performance of assets, through strong relationships with both entrepreneurs and GPs, will enable more accurate pricing and exclusive sourcing of the best deals.”
—Chloe Dagnell, Principal, Isomer Capital
#9: We will see a rebound in VC fundraising
“Next year, we will see a rebound in VC fundraising from the depths of 2023 – although don’t expect fundraising to reach the highs of 2020 and 2021 as managers will continue to face an uphill battle to secure commitments. 2023 sees a ~50% drop in the number of capital raised as well as a ~60% drop in total capital raised since 2022.
— Sunaina Sinha, Global Head, Private Capital Advisory, Raymond James
#10: Next generation family office leadership will support more VC engagements
“Family office volume has grown >10x since 2008 and has served as one of the few available sources of capital for founders and fund managers in the current market slowdown.
In this context, we are in the midst of the largest intergenerational transfer of wealth in history. I believe this emerging wave of next-generation family office leadership (especially millennials whose lives have been shaped by technological innovation) will support greater venture capital activity in 2024 and beyond. Uniquely, many of us seek to produce top quartile returns and align our investment portfolios with our values.
Overall, I expect a healthier business ecosystem for everyone once the IPO market is fully open.”
— Esther Tricoche, CEO, MALIAM
#11: Young managers starting VC firms will increasingly be spin-outs from large firms
“Over the next 12 months, I believe we will see a steady pace of new fund managers starting firms, and an increasing number of these managers will come from existing brands rather than primarily from an operational background. I expect they will have a hunger and buzz that will benefit founders after years of tourist investors and create competitive pressure for other established investors to up their game.”
— Lisa Cawley, CEO, Screendoor
#12: 2024 will be the year of the hyper-specialist VC
“2024 will be the year of the super-specialist VC. Where conviction is hard to come by and FOMO doesn’t drive investment decisions, experts who know how to pick in that market will shine. With a significant reduction in capital allocated to VC in 2023, the laws of supply and demand are tipped in favor of GPs with capital. Specialists who choose well and pay close attention to entry prices have the power to unlock big returns, while the number of GPs investing can be halved.”
— James Heath, Investment Principal, dara5
#13: VC firms that are very established, either through legacy or specialization, will be more attractive to LPs
“The same is true of how LPs think about making new commitments. those that are highly established, either through legacy or expertise, will be more attractive as potential prime investment opportunities for LPs, as safer pairs of hands in a still turbulent market.
Therefore, emerging managers need to prepare teams that can demonstrate some experience and passion for strategy, and already have (or at least create) competitive advantages to source, win and grow large investments in a cycle. Investors have many choices about where and when to deploy their funds, so emerging managers’ propositions must be even more compelling than existing options.”
—Chloe Dagnell, Principal, Isomer Capital
#14: Top performing VC firms will generate the lion’s share of returns
“Unless you have access to top-performing executives, LPs might be better served by avoiding venture capital. The best performing VC firms will continue to generate the lion’s share of returns for the asset class, highlighting the importance and difficulty of manager selection.
Between 2010 and 2015, the average spread between top quartile and median funds was 1.23x, a much larger spread than between median and 3rd quartile funds, 0.68x.”
— Sunaina Sinha, Global Head, Private Capital Advisory, Raymond James
