You may have noticed fewer new venture capital-backed startups (like Airbnb or Uber) lately. The market slowed to a crawl after 2021, but things are expected to take off again in 2025.

Opening Bell

Mark Your Calendars – Venture Capital Is Coming Back in 2025

2023 saw just 154 companies make their public debut while the slowdown could continue into this year as Crunch base its new Q one global venture capital funding report found that the first quarter of 2024 saw the second lowest funding since 2018. So joining me now to break down, the data is Jat, a senior data editor at crunch based news as I thank you so much for joining it and talk to me in your words about the findings of this report. Yeah, I think what's interesting is, you know, recently we interviewed Kauffman fellows who surveyed all of their venture investors and they predicted that 2024 was going to be a better year that we were going to see more investments in 2024. And our Q 1 2024 report does not show that we show venture investing continues to be incredible sluggish. We're eight quarters into this downturn. So 2022 Q 1 was incredibly high and then we saw it come down in the second quarter. So eight quarters in we haven't really seen things shift ventures down. It was down in 2022 by a third. It was further down in 2023 by and we're still seeing it be lower. You know, it's the second lowest quarter since 2018. So that is indication of how investors feel they are not diving into the market at this point. So let's go back to 2018. And what was happening in the economy then are there any parallels that you would see in the first quarter of 2024 perhaps to 2018? That might give us some indication as to why funding was slow? Yeah. Well, I think what's interesting if you track I was looking back, I've been doing this for more, almost close to a decade is looking at the venture markets using the Crunch based data set and we track all the news we have found as adding data and what we saw from 20 over the last decade, we really saw venture as an asset class grow and almost every year, venture grew all the way through to 2021 and then 2021 it just shifted and completely weekly doubled. 2019 was down a little bit year by year, but every other year it was up. And so what we've seen is a kind of see we're really in this big response to the overvaluations or the amount of money that invested in 2021 in 2021. All the investors at seed early stage, late stage invested more, they're all seeing if they invested now those deals within nine months to a year would raise even more funding. So if they didn't invest, they'd miss out. So really the climate that we're in is a reaction to the massive amount of money that went in in 2021. And then things shutting down at the end of 2021 where was slower, the IPO markets we've seen have gone away. And so the whole climate is still kind of dealing with the excesses of the funding in 2021. So do you think it's going to take lower rates to get this funding market on the VC world active again? Yes, I do think, I mean, there are some positive signs, obviously, we've seen a couple of companies go public this year, we saw Sterol LA and we saw Red go public. Asa Lab is obviously doing very well. Reddit is sort of holding up on its IPO price. People talk a lot about the fact that they think this year is going to be incredibly strong. So I think there is, you know, there are some improving signs, some of the stocks that were down a year ago are doing better, better this year. And so there are some warm signs in the markets but definitely where things are not shifting yet. I think if interest rates did come down, I think that would have a big impact and what's interesting is very large. The magnificent seven that everyone talks about those stocks have gone up significantly. The companies of below that haven't seen that value uptick. And so possibly if interest rates come down, we're not going to see just all the money going to the magnificent seven because they've been, they've had a lot of valuation increase in the last year and maybe some of those other tech stocks which are promising might get a little bit more of a look in interesting. And now in terms of the investments that we are senior or even interest out there, what are you finding is attracting attention? Is it a variety of companies or is it more in certain sectors? Yeah, we're seeing, you know, late stage fluctuates a lot. We see very, very large rounds. We don't see consistently money going into sectors. But I think the sectors that are the hottest is A I is a big sector that raised 11.4 billion or 17 per cent of venture. I think what's interesting is it's not the largest sector, health care and biotech was the largest sector and that's consistently through the last to you has been one of the leading sectors. We've seen a lot of money and that's obviously impacted by A I as well. The other spaces where we've seen is really more on the deep tech side. We've seen money go into the semiconductor industry, we've seen investment go into electric vehicles and green energy. So those I think have been the sectors that have seen the largest dollars in the last in this quarter and also in the last year or so, in terms of the IPO pipeline, I, do you think based on your knowledge that that is maybe being repriced, certainly the fed reset expectations in terms of interest rates at the start of the second quarter. And we had heard that, you know, we were expecting ipos to really kind of pick up some of these start ups on the sidelines that were finally feeling like the market was strong enough to actually get out of the gate. But given that volatility continues to creep higher in the market. Geopolitical tensions are even more focused. I think it's fair to say right now, how do you think that might impact companies that are private that are VC funded that are considering an IPO? Yeah, from talking to analysts. What I'm hearing is that we expect 2024 there will be some significant companies that do go out in 2024 but there's no push for these companies to go out and most likely go, they're gonna wait till 2025. A lot of these companies have money on their balance sheets. Large revenues have been tightening their belts and preparing to go public, but I don't think any of them feel they have to rush out to go out to get to enact a financing event. So I think these companies can wait. So I think we will see some companies brave the market this year, as I say, because valuations are up a bit. Obviously, it's still very scary out there. And so some companies might decide to wait until 2025. Do they feel confident that 2025 will be a sure thing given where we are in the cycle. What I'm hearing is, yes, that companies are preparing, they've had the last two years to prepare and that 2025 is looking to be the year where things take off. Obviously, if there are, you know, lots happening on the geopolitical front, if interest rates don't come down, that might shift. But certainly right now, what I'm hearing is 2025 is when we can expect things to open up a bit. How does the presidential election uh Jana impact the venture capital space and, and what are some of these V CS and even some of these start ups preparing for as we get closer to the November election? I'm not sure to be honest how the presidential election is going to affect the, the, the private markets. I think the, you know, I think the biggest outlook I have on it is that the venture markets are slow. They might pick up a little bit in 2024 but certainly it's going to take the IPO markets or the really the exit markets to open up for the venture industries to start investing at a larger pace. And certainly in talking to investors, they see being the largest way in which they're going to get the this year. And then secondly, secondary fundings where other investors are coming in and buying earlier funds positions in private companies. Ok. Now, in terms of the ipos that we have seen this year, reddit and sterile labs, how is the VC world or based on your conversations, how is the landscape responding to those ipos? Do they, do they feel like they went well or that they could have gone better? I think both of those companies did pretty well. There was a big lift, they priced at a higher range, there was a big lift as they went out, we're seeing, reddit is sort of around above where it went out but not massively astera labs because it is seen to participate, even though it's not an A I semiconductor company, it does participate in um data connectivity and it's seen to benefit from this, this whole investment in hardware that we're seeing. And so a sterile labs has gone up massively. But I think the challenge for the market is these are, there are not a whole space of companies going up and you can judge by these are just two data points. Um Certainly they're not bad but it, as you said, it's still a risky market out there. Uh JT, senior data editor at Crunch based news, Jad. Thank you so much. It was a great segment.