Footnotes
1 Venture Pulse Q1'24, Global Analysis of Venture Funding, KPMG Private Enterprise. April 2024.
2 Ibid.
3 Ibid.
4 IPO Insights Q1 2024. KPMG LLP. May 2024.
Unlocking opportunities: Navigating private company funding
Explore challenges facing private company leaders in securing funding, and learn how to navigate this challenging environment.
Share
Find out more about this quarter’s trends and results in Venture Pulse, a quarterly report by KPMG Private Enterprise.
Initial public offering (IPO) and merger and acquisition (M&A) activity is depressed. Bridge financing is becoming hard to come by. And venture capital (VC) investors are pulling back from dealmaking. This is a challenging environment for private company leaders looking for funding.
In this edition of Privately Speaking, we explain the current trends influencing private company financing, identify the challenges, and offer some advice to help founders and executives plan their growth strategy.
Backing away from the deal table
This is not an easy time to be going out for funding. According to the most recent Venture Pulse report, VC investment in the US fell from $40.1 billion in Q4’23 to $36.6 billion in Q1’24 as investors pulled back from dealmaking, particularly for later-stage rounds.1 Not surprisingly, the number of reported down rounds has continued to tick up in the quarter. Many of those hoping to stave off a new round of funding with some bridge financing found themselves disappointed.
All signs suggest these trends will continue. Ongoing market challenges—including the lack of exits, high interest rates, and continued geopolitical uncertainties—will keep VC investors cautious during the second half of the year, particularly as the election draws near.
The anomaly of AI
Interest in artificial intelligence (AI) remained very strong among VC investors in the US in Q1’24, led by the $4 billion raise by Anthropic.2 More recently, Elon Musk announced that his AI venture (xAI) had raised $6 billion, giving it a valuation of $24 billion barely a year after its founding.3 Indeed, VC investors showed a willingness to write checks, even for small percentages of companies, in order to get into the game.
However, this investment frenzy is likely to slow in the near term as the largest players continue to gain traction and others lose steam. Interest in AI will likely begin to shift towards companies with unique value propositions, including industry-specific solutions and tools, and to companies able to prove the value of their tools in terms of enhancing productivity or reducing headcount.
“Companies that have got true generative AI solutions—so the large language models and the like—those are the startups that are going to be funded the most because there’s a lot of FOMO there. But the next wave of AI investment is likely to be more targeted, more vertical or industry specific, such as solutions targeted towards documentation, task-heavy industries like fintech, real estate, and proptech where the value of AI is potentially very significant.”
-Francois Chadwick, Partner, KPMG Private Enterprise, KPMG LLP
Get the latest insights on US IPO activity from the KPMG Private Enterprise specialists in IPO Insights.
IPOs are up, but returns are down
The good news is that IPO activity is up over the lows of 2022. In fact, according to the most recent edition of IPO Insights, volume in 1Q’24 rose by 24 percent over 4Q’23.4 But the vast majority of the new issues in the first quarter ended the period below their opening price. That has undermined confidence. A growing number of candidates are pushing back (or canceling) their plans.
“There are a lot of eyes on the IPO market right now. Hopefully, we see a couple of successful IPOs in the middle of the year and then others follow on—creating the value and the wealth that can then be put back into the market. If we do see a couple of successful IPO exits or companies indicating that they’re going to go, we’ll start to see VCs loosening their purse strings, in part because their LPs will start putting pressure on them to invest.”
-Conor Moore, Global Head, KPMG Private Enterprise, KPMG International and National Leader, KPMG Private Enterprise, KPMG LLP
Recent economic data suggests high interest rates will persist for longer than many anticipated. But the timing is tight; if interest rates don’t fall over the summer, then the upcoming election will keep the lid on the IPO markets well into Q4’24.
M&A exit doors remain shut
M&A activity remained stalled in the first quarter of 2024, driven by a number of factors, including higher interest rates making it more expensive for companies to conduct acquisitions. The regulatory climate may have also subdued M&A activity, with a number of deals blocked by regulators over the past year.
That being said, M&A activity is expected to pick up in the second half of the year as start-ups without a clear path to IPO or the ability to raise funds run out of cash and look to sell. This is likely not the outcome most private company owners are hoping for.
Venture-backed exit activity ($B) by type in the US
2018-2024*
Source: Venture Pulse Q1'24, Global Analysis of Venture Funding, KPMG Private Enterprise. April 2024.
What to expect going forward
Heading into the second half of the year, VC investors are expected to concentrate their bets on quality assets, focusing more on what return on investment new dollars can generate rather than on providing life support capital to businesses that have been unable to perform.
At the same time, the prospects of a big bang opening of the IPO markets in 2024 are looking increasingly long. A few successful IPOs over the summer would certainly help build momentum. But much will depend on how soon and how steeply interest rates start to fall. The keys to the IPO window are in the Federal Reserve’s hands.
What’s your next move?
Before you decide to put your hand out for more money, make sure you have done everything you can to right-size the business. Founders are being told to sweat their assets and stretch their budgets further, reduce headcount without impacting revenues, and prioritize near-term opportunities over long-term future growth.
The situation can change quickly. And some predictions suggest that—even in a pessimistic scenario—IPO volumes could rise quickly. And that would help encourage VC capital to start flowing again. Private company leaders should be prepared.
“Now is the time to prepare for the potential reopening of the IPO window. Take advantage of the runway you have now to prepare, as waiting and rushing could end up being more costly for you.”
-Shari Mager, US National Capital Markets Readiness Leader, KPMG LLP
Dive into our thinking:
Explore more
Insight
Venture Pulse Q1 2024
The Venture Pulse report provides insights around trends, opportunities, and challenges in the U.S. venture capital market.
Insight
IPO Insights Q1 2024
Perspectives on the quarter’s market trends
Insight
Privately Speaking Series
Practical insights for private market leaders from private company advisors.
Meet our team
Conor Moore
Global Head of KPMG Private Enterprise, KPMG International, and Head of KPMG Private Enterprise, KPMG US
Francois Chadwick
Partner, Tax, KPMG US
Shari Mager
Partner, U.S. National Leader, Capital Markets Readiness, KPMG US
Conor Moore
Global Head of KPMG Private Enterprise, KPMG International, and Head of KPMG Private Enterprise, KPMG US
Francois Chadwick
Partner, Tax, KPMG US
Shari Mager
Partner, U.S. National Leader, Capital Markets Readiness, KPMG US
Subscribe to Private Enterprise insights
Subscribe to receive pertinent information that will help you drive value for your private company.