Venture Capital Upturn Difficult To Predict After Tough First Half

The last time I wrote about venture capital – back in April – I figured that the slowdown that was occurring in Q1 would continue into Q2. Hardly a revelatory statement, of course, but indeed, the first half has been tough for the VC folks.

Fundraising has slumped quite drastically. According to the Q2 2023 Pitchbook NVCA Venture Monitor, only $22bn has been allocated to 233 funds. While we’re still only halfway through the year, that’s pacing for the slowest year since 2017. And it’s been tough for the newer folks as well – only $3.6bn has been committed to 52 first-time funds.

Exit activity has also remained low, but an interesting observation is that acquisitions, as a percentage of exit activity, at 56.5% of activity, is already at the highest level since 2016.

But it’s important to emphasise that, compared to historical levels, the venture industry is operating somewhat close to normal. It’s not that current levels are the outliers – 2021 and the first half of 2022 are the irregularities.

The space had a difficult first quarter, as we all know. And it’s hardly been a banner start to H2 – a couple of high-profile lawsuits in the space are being covered by the news and trade media, and the US Government has taken steps to restrict investment in China, although the latter only affects mostly the larger firms and funds.

I originally predicted Q4 for when I thought VC deal activity might start to pick up, and I’m sticking to it. Indeed, many of our clients on the VC side tell me that, while they’re being more selective (as it seems is every VC at the moment), there are still plenty of opportunities and they’re seeing plenty of pitch decks – God bless the American entrepreneur, indeed – it’s just that caution is the name of the game at the moment.

School is back in a couple of weeks, and so VCs will return to their planes, trains and automobiles, looking for opportunities to allocate the record amount of dry powder they’re sitting on ($279.8bn, according to Pitchbook).

It’s got to find a home eventually, and whether Q4 does deliver a return to growth of deal volumes remains to be seen. In the meantime, if you’re in New York this fall, apparently, you’ll find me – and a bunch of others in the VC space – in the Crosby Street Hotel.

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Anthony D. Mascia is Managing Partner at EFSI. Connect with him on LinkedIn here.  

EFSI is an independently owned, SOC-1 compliant, full-service fund administration firm. We provide accounting, reporting, administrative, and capital introduction services to a wide range of alternative investment funds including hedge funds, funds of funds, private equity funds, real estate funds, venture capital funds, and family offices. The center of EFSI’s service incorporates resilient technology and accomplished staff, providing clients a tailor-made service with exhaustive transparency. Give us a call today or reach out to our support team online. We look forward to hearing from you soon.