Given continued economic uncertainty and the fallout from recent bank failures, we expect that many start-ups will continue to struggle to seek new capital. Investors will likely focus on extending the runway for their existing portfolio companies, and we anticipate that new deals will take even longer to be completed. That said, new companies will continue to emerge in this environment, especially those that are able to leverage game-changing technology like generative artificial intelligence.
Fund formation continues to slow, dropping to $13.0 billion in Q1 2023 from $13.7 billion in Q4 2022 and from $78.1 billion a year ago in Q1 2022.¹
Like what we saw in the post-dot.com era, recession concerns could impact the dry powder equation. While the current capital on the sidelines won’t disappear, we might see fund restructurings, with existing dry powder going to support current investments and investors exercising more caution before deploying capital.
In this environment, entrepreneurs will need to reevaluate their options and examine all their financial operations, from cash balance and run rates to venture debt. VCs will continue to deploy capital, but deals will be more investor-friendly. Entrepreneurs will need to sharpen their business models and demonstrate a clear path to cash breakeven/profitability. Entrepreneurs with solid unit economics and realistic growth projections will be best positioned to compete for VC dollars.