VC investment in the US declined significantly in Q4’23, driven by continued economic and geopolitical concerns, the relatively weak post-IPO performance of companies that tested the IPO waters in Q3’23, and the major slowdown in the time to complete deals.

AI sees red-hot interest from VC investors in the US

AI continued to attract an enormous degree of attention from VC investors in the US during Q4’23, with investment flooding into companies operating in the space. Investments in AI were vast and varied, spanning a wide cross section of industries and service offerings. The AI space attracted many of the largest deals in the US during Q4’23, including a $2 billion raise by generative AI and large language model developer Anthropic, a $1.7 billion raise by AI-powered parking platform Metropolis, a $684 million raise by AI-powered data analytics platform Databricks, and a $323 million raise by neurotech company Neuralink. 

IPO market remains shuttered despite Q3’23 IPOs

There was some hope that the three major IPOs that occurred during Q3’23 — including US-based companies Instacart and Klaviyo, in addition to UK-based Arm — would lead to additional companies making IPO exits in Q4’23. The IPO and post-IPO performance of these companies, however, was not enough to start even a trickle of additional IPO activity. This result is casting a significant pall on expectations of a recovery in the IPO market during the first half of 2024; despite companies working to improve their IPO readiness and the possibility of one or two major IPO exits, it is possible that any significant reopening of the US IPO market will likely occur in the latter half of 2024.

The Q3’23 IPOs, however, did provide a indicator for private company valuations; this contributed to a growing alignment between the expectations of founders and investors during Q4’23 as to the true valuation of private companies. This could foster additional deal making heading into Q1’24, if not 2025 given the historical slowdowns that we tend to experience in election years.

Bay Area shows the most resilience compared to other US startup hubs

On a regional level, the Bay Area showed the most resilience in 2023 with respect to VC investment, compared to 2022. While VC investment in the Bay Region increased from

$33.7 billion to $41.4 billion year-over-year, other areas faired poorly. Hardest hit were Seattle and Denver which both dropped over 65 percent year over year followed by New York (50 percent decline), Philadelphia (37 percent decline) and Boston (13 percent decline).

The resilience of the Bay Area likely reflects a number of trends, including the significant investment in AI-focused companies — many of which are based in the Bay Area — and the presence of a number of highly valued private companies that had to put their IPOs on hold during 2023 and so raised large mega-deals to help bridge the gap.

VC firms using rollover funds in order to extend the life of VC funds

Given the incredibly dry exit environment, a number of VC funds began to consider or introduce rollover funds during Q4’23 in order to carry over their investments from aging funds in order to extend the runway needed to bring companies within their portfolio to successful exits. These rollover funds are being used as a means to give some LPs an opportunity to exit because of the length of time the funds have been invested in certain companies. While relatively new for VC firms, rollover funds have been used quite regularly in the PE market.

Trends to watch for in Q1’24

VC investment in the US is expected to remain subdued heading into Q1’24 as investors continue to conduct a significant amount of due diligence on deal opportunities, and prioritize investments in companies with robust unit economics and sustainable business models given the current business climate.

AI will likely remain a key exception, with VC investors in the US expected to continue to pour money into the space during Q1’24. Longer term, VC investment will likely begin to focus more on companies with true AI offerings as opposed to companies providing AI wrappers to existing technologies or solutions. Solutions focused on the enterprise AI space will likely also increasingly attract attention as businesses across industries look to integrate AI into their operations in order to enhance their human workforce and drive efficiencies.

Venture financing in US

In 2024, there’s likely going to be growing pressure from VC funds for startups to get out there. We’re going to start seeing more startups getting ready for IPOs, and some testing the IPO waters. Any full reopening, however, is not necessarily going to be quick, particularly because of upcoming US and UK elections. 2025 is more likely when we’ll really start to see the markets opening up again.

Francois Chadwick
KPMG in the US

  • VC deal value falls slightly to $37.5 billion across 2,879 deals

  • Down rounds climb towards pre-2018 levels

  • Corporate VC continue to pull back

  • Exit activity slow as IPOs remain on hold

  • Surprising surge in first-time fundraisers to close the year

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