VC investors taking time to evaluate opportunities

Mega-round financing

Mega-rounds continued to hold steady from the levels of 2023 as most investors continue to be cautious writing substantial checks. On the positive side, significant amounts of dry powder remain on the sidelines, ready to fund companies with strong value propositions. In addition, an increasingly optimistic outlook for the US IPO market could help to break the logjam, returning capital to investors who may want to channel those funds back to startups.

Private equity firms continue to show increasing interest in the VC market, with private equity participating in three of the top ten deals.

Sectors

For the first time since Q4 2022, health care surpassed information technology, securing the top spot due to a significant deal for a radiology health services company. Energy and utilities also surged in Q1 2024, with a major deal for a sustainable infrastructure company, but business and financial services held onto third place. Consumer services had a strong quarter, buoyed by a large deal for a gaming company based in North Carolina.

Regions

The San Francisco Bay Area held onto first place, securing 36% of total VC investment in Q1. New York followed up on a weaker performance in Q4 2023, recording 14% to reclaim the second spot, followed by Boston and Los Angeles, which each accounted for 7% of total VC dollars. Five biotech deals over $100m in March alone helped to boost San Diego into the top five.

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Overall outlook for Q1 2024

While the broader macroeconomic backdrop seems to be stabilizing, that has not translated to the venture capital ecosystem. Startups continue to be challenged by the valuation overhang. That takes time to work through, and it’s painful, especially for founders who have never been through a down cycle like this, which hasn’t happened in over 20 years.

As mentioned above, we anticipate that many of today’s startups will need to begin fundraising again, after being out of the market the last couple of years. We expect this will translate to a pickup in VC activity. Given the environment, founders, especially those already in the venture pipeline, will need to convey a compelling growth story and market-disrupting technology to compete for investment.

On the bright side, the US economy does appear to be executing a soft landing. And as we noted earlier, the IPO market is improving after a few challenging years. This market will reward companies that have attracted experienced team members, built solid internal controls and demonstrated a path to profitability. Companies with an exciting value proposition, especially in AI, will continue to get attention and investor dollars. A pickup in public market activity will recycle capital back into the ecosystem and provide support to the companies we expect will be fundraising again in the coming months.

It’s too soon to determine whether the quarter-over-quarter increase in VC activity in Q1 2024 signals that the market has finally hit bottom. Investors will continue to be selective when deciding which startups to fund. While we don’t expect a return to the heady days of 2020–22, continued improvement in the public markets may encourage more investment.