Q3’23 Venture Pulse Report – United States

IPO window opens a fraction; companies working to prepare

The IPO window in the US has been firmly closed for well over a year. In the latter half of Q3’23, the window opened a fraction as UK-based AI chip design firm Arm and US-based grocery delivery company Instacart conducted IPOs on the Nasdaq, while US-based marketing automation firm Klaviyo listed on the NYSE. All three IPOs were reasonably successful. Arm raised over $4.8 billion in the largest IPO of the year, with its shares rising more than 25% on the first day of trading; ^{1 2} Instacart raised $660 million, with its shares closing over 12% higher;³ and Klaviyo raised $576 million, with its shares closing 9% ahead.⁴

As of the end of Q3’23, the post IPO performance of all three companies has been mixed, although their ongoing performance is something that will need to be watched heading into Q4’23 and Q1’24. While Q4’23 may bring additional IPOs, it’s more likely that any complete opening of the IPO market will likely occur in 2024. A number of mature startups in the US and their investors, however, are looking at the IPO market with cautious optimism, and are working to ensure they will be ready to take advantage should IPO market conditions improve.

VC firms taking a stronger hand with their portfolio companies

Given the challenging market conditions and economic environment over the last few quarters, many VC investors in the US have been slow making deals, choosing instead to focus more of their attention on their current portfolio companies. This continued to be the case in Q3’23, with a growing number of general partners spending significant time on the ground with their portfolio companies in order to provide more concrete guidance on improving different aspects of their business, from business and operational strategies to marketing approaches and product and technical roadmaps. These activities have focused primarily on startups where VCs have deployed a significant amount of capital, or on highly promising startups in an effort to help them evolve to a point where they can begin to demonstrate a path to profitability.
 

First time VC funds facing greater challenges as LPs put pressure on VC firms

With interest rates up and more options at their fingertips, LPs are starting to get more selective with their investments. They are also putting significantly more pressure on the VC firms they invest with to show results. This has led to VC firms conducting fewer deals and substantially more due diligence. It has also led LPs to become more cautious about investing in new funds—particularly first time funds—without having a proven track record. During Q3’23, a number of first time funds struggled to raise funds—a distinct change compared to a year or two ago, when proven investors rarely found it difficult to fundraise, even into first time funds.

Trends to watch for in Q4’23

Heading into Q4’23, many eyes in the US will be on the IPO market to see whether other tech startups follow in the footsteps of Arm, Instacart, and Klaviyo. If the IPO market opens up more broadly, M&A activity could also experience a rebound as investors receive more certainty as to whether valuations have stabilized at a healthier level. While fundraising activity is expected to remain slow across the US in Q4’23 and into Q1’24, as exits start to materialize in greater numbers and liquidity gets back to the investor base, fundraising will likely begin picking up again.

Within the US, AI is expected to continue to attract significant attention from VC investors, particularly AI focused on specific sectors like health and biotech and legal and professional services. ESG, meanwhile, could see some pullback over the next few quarters as an overarching focus of companies, although environment-focused solutions, such as alternative energy and cleantech, are expected to remain attractive.