If I had to characterize 2023, I’d say it was the year of the great venture divide. Many aspects of venture didn’t follow one trend, but instead saw the emergence of extremes on either side of the spectrum.
Most startups continued to struggle to fundraise, but if you happened to be building in AI or defense, you could pretty much raise money like it was still the high-flying market of 2021. Exits remained at their lowest level in years and we saw what might have been the largest startup acquisition of all time get abandoned due to regulatory concerns. And despite all the doom and gloom, we saw a few top companies exit through a crack in the IPO window.
So, does that mean we’re going to have more of the same in store in 2024? To find out, TechCrunch+ surveyed more than 40 venture capital investors about how they are preparing for next year and what they expect. All the investors agreed on some areas — they don’t think LPs are going to clamor for liquidity, and valuations still have room to come down — but they didn’t agree on other potential trends.
Some investors think exits will return in full force in 2024, but others predicted the industry would not see meaningful liquidity until 2025. Several investors expect AI investing to cool next year, and an almost equal number think the sector will continue to remain red hot, only in different ways.
Read on to see where investors expect the next venture bubble to pop next year, which startups they think will IPO first and if they expect to see more startups shutting down in 2024 than in the past few years.
How is the current economic climate impacting your deployment strategy for 2024?
Matt Cohen, founder and managing partner, Ripple Ventures: We’re adopting a more selective approach, focusing on capital efficiency (i.e. 18-24 months of runway versus 12-18 months back in 2021) as the metrics to raise the next follow-on round keep moving higher for non-AI companies (B2B SaaS).
George Easley, principal, Outsiders Fund: In terms of pace of deployment, we find the current climate attractive. We deployed rather slowly in 2021, kept it steady in 2022, accelerated in 2023 and expect to accelerate again in 2024.
Don Butler, managing director, Thomvest Ventures: We found ourselves investing both in new companies as well as in our portfolio companies at a pace that was roughly half on new companies and half on our portfolio companies. Many of our existing portfolio companies cut expenses and have now either reached breakeven (at the later stages) or have the runway needed to continue to grow well into 2025 and beyond.
We are now focused heavily on new investments next year and believe we will be at or above our historic pacing for new investments.
Larry Aschebrook, managing partner, G Squared: As liquidity pressure continues to build for private company shareholders whose exits have been held up by the backlog, we see increasing opportunity in secondary markets. Our deployment strategy flourishes in these conditions and allows us to secure quality, sought-after assets often at deep discounts to recent financings. Our focus is fixed on secondaries and will be for the duration of the year.
Lisa Wu, partner, Norwest Venture Partners: As multistage investors, we meet founders wherever they are on their journeys. In this economic climate, we’re especially interested in seed and Series A opportunities.
How will startup valuations evolve next year?
Jai Das, president, partner and co-founder, Sapphire Ventures: We will see many more recapitalizations and down-rounds in 2024. Startups that have inefficient business models and lack investors willing to support them will shut down or be sold for pennies on the dollar. Lots of seed-stage companies will also have a hard time raising Series A since investors at that stage have become much more selective.
Pradeep Tagare, head of investments, National Grid Partners: Certain sectors, such as climate tech, will continue to see valuation premiums across all stages.
Simon Wu, partner, Cathay Innovation: The bifurcation between perceived tier-one deals (typically AI-related) and “everything else” will continue. The spread is already quite large (2021 pricing on one side), while the “have-nots” can barely get a round together.
But in 2024, this will be more pronounced than ever before. Given the rapid pace of innovation around AI applications, any company that had a great 2023 might get usurped in 2024. At some point, AI-related companies that raised big rounds will have to face the music and raise another.
Michael Marks, founding managing partner, Celesta Capital: Startups will be forced to prioritize solving for capital and avoid fixating on valuations. In the current environment, startups don’t have the leverage to drive a hard bargain or focus solely on the price. Instead, the priority will be securing the necessary capital, even if it means being flexible with the terms.
Those who focus on living to fight another day and continuing to build value in their business will be the winners. The valuation of a company will take care of itself in the long run.
Eddie Lee, general partner, White Star Capital: This year was heavy on complex structuring, so headline valuation figures were often misleading. With fewer rescue financing rounds happening in 2024, I suspect that cleaner terms and valuations will come back.
Elena Mazhuha, investment director, Flyer One Ventures: Valuations are not likely to change radically, but if the optimistic interest rate forecasts for 2024 are accurate, I can very well imagine startup valuations increasing slightly by the end of next year.
Sarah Guo, founder, Conviction: The “other shoe” is still to drop for mid-stage venture-backed companies that raised during the market’s peak. Even many of those that are executing well will reprice with flat or down-rounds.
Will it vary by stage?
Matt Cohen, founder and managing partner, Ripple Ventures: Yes, Series A startups may face tighter valuations due to increased scrutiny, but the pre-seed and seed stages are still strong. Growth-stage companies with proven models may fare better in securing funding, but [they’ll do so] at similar multiples to U.S. public companies (5x-10x ARR).
Nichole Wischoff, founder and general partner, Wischoff Ventures: At the pre-seed and seed stages, I expect valuations to be on the lower end and stay there (below $18 million for seed and below $10 million for pre-seed).
Alexandre Lazarow, managing partner, Fluent Ventures: I expect the trends in the early stage to continue in 2024. The growth stage remained quiet in 2023, with many structured and/or internal rounds that punted valuation downgrades to the future with more structured terms (e.g. liquidation preferences). I suspect the rubber will hit the road in 2024 and some of these will get adjusted.
Sophie Bakalar, partner, Collab Fund: Our team has seen many Series B and C deals closing at nearly the same pricing as Series A. But these companies have typically accomplished significant de-risking milestones, particularly from a commercial perspective. The seed stage remains highly competitive, and valuations are still relatively elevated.
Paige Doherty, founding partner, Behind Genius Ventures: I think the pre-seed and seed stages are in a weird static bubble, and it seems as if Series A and later rounds fluctuate in valuation more. I see more variation by geography than I do by stage.
What will the exit environment look like in 2024?
Kirby Winfield, founding general partner, Ascend: I feel like there will be some large exits at low-ball prices for companies that are severely underwater [compared to their] last valuations.
Nichole Wischoff, founder and general partner, Wischoff Ventures: Companies can’t wait much longer to have an exit — a lot of liquidity is locked up. I expect to see more than five times what we saw this year.
Jai Das, president, partner and co-founder, Sapphire Ventures: Investment activity will increase, but remain tempered. With high-profile tech IPOs now trading at low multiples, companies aren’t eager to go public in early 2024, and most won’t risk doing so in the middle of an election cycle. As a result, the IPO window is unlikely to open until 2025.
That said, given the potential for the Fed to cut interest rates in 2024, I expect SaaS multiples to go up, and some startups will visit the public markets sooner than initially expected. A lot of boards will realize that companies will not reach the metrics required to go public ($400 million to $500 million in revenues and growing at 20% or higher), and will look to sell to private equity firms. Large tech companies will make smaller strategic acquisitions, but larger deals will be on hold due to concerns about regulatory hurdles.
Pradeep Tagare, head of investments, National Grid Partners: There will be a few successful tech IPOs in the second half of 2024, but overall, the exit environment will continue to be challenging for tech companies.
Don Butler, managing director, Thomvest Ventures: We think the majority of exits in 2024 are likely to be due to company shut-downs. If you look at data from Carta, you can see that this number has been growing over the last few quarters, and we expect that it will continue to do so in 2024.
The historic number of new companies that were started during the most recent bubble is likely to (unfortunately) result in a similarly historic number of startup shut-downs.
Grace Isford, partner, Lux Capital: We will continue to see a lot of acquisitions, especially by players like Snowflake, and opportunity for well-funded startups to consolidate.
Elena Mazhuha, investment director, Flyer One Ventures: If exits are still delayed, the secondary share market may become livelier. I can see early-stage funds experimenting and selling some of their shares in startups to generate returns and demonstrate liquidity to their LPs more often.
Leslie Feinzaig, founder and general partner, Graham & Walker: Now that inflation has cooled and the Fed has signaled a pause on interest rate hikes, I do think the IPO window could open again in 2024. On the flip side, there are big geopolitical forces shaking up markets — two wars, supply chain interruptions and a very unpredictable election year in the U.S.
So it’s really anybody’s guess if the public markets are steady enough to support a real IPO window. I do think the market for secondaries will provide more and better liquidity for well-performing companies next year.
Ed Sim, founder and managing partner, Boldstart: With the Figma-Adobe merger called off, I believe many investors and founders now fully understand that it’s very hard to close mega-deals, or deals over $1 billion, due to antitrust issues and regulators.
However, we will start to see more tuck-in, innovation deals at the smaller end, up to $500 million. These opportunities mean that reducing the amount of capital raised provides better outcomes for all. This is what companies like Palo Alto Networks specialize in, and we expect to see more of these less-than-$500-million acquisitions in 2024, as they are usually too small for regulators to care about.
Which startup will IPO first?
Seven investors: Stripe.
Six investors: Databricks.
Five investors: Shein.
Three investors: Reddit, Rubrik.
Two investors: Klarna.
One investors: Circle, Navan, Canva, Chime.
What’s going to be the next big bubble?
Kirby Winfield, founding general partner, Ascend: Deep tech.
Nichole Wischoff, founder and general partner, Wischoff Ventures: Defense.
Drew Glover, general partner, Fiat Ventures: 2024 will be the death of AI.
Sarah Sclarsic, founding partner, Voyager Ventures: Within climate tech, we see a market distortion in hydrogen — the incentives and investment activity in hydrogen production is not yet matched by demand for hydrogen as a feedstock or primary fuel.
Maren Bannon, co-founder and managing partner, January Ventures: There has been an explosion of climate tech startups in the past couple years, but unfortunately in the U.S., this sector has become politicized. There is also a lot of “greenwashing,” where misleading statements are made about a product’s benefits. I think these factors will erode trust in climate solutions, and risk causing a repeat of the clean tech 1.0 bust.
Sailesh Ramakrishnan, managing partner and co-founder, Rocketship.vc: We’ll see the reckoning of first-wave generative AI next year. The companies that raised money at inflated valuations but only had ideas and no real revenue or business model will pivot and try to find a business.
Many of them will fail, and since they cannot justify their valuation, will have to sell. If, however, they recognize their peril and cut costs significantly, they may be able to survive long enough to find a way out.
Ed Sim, founder and managing partner, Boldstart: Any inception round, as every VC on the planet is chasing these pre-incorporation opportunities and it’s starting to get frothy.
What are your LPs asking you right now?
Spencer Greene, general partner, TSVC: LPs want transparency. We’ve heard of LPs who have exposure to the same startup through multiple managers, and different managers will mark the share price very differently — higher marks in such situations are suspect.
What’s that Warren Buffett quote? “Only when the tide goes out do you learn who’s been swimming naked.”
Sheila Gulati, managing director, Tola Capital: Valuation defensibility and liquidity of late-stage assets: How do you ensure the valuation defensibility of late-stage assets in your portfolio? What strategies are in place to enhance liquidity for these assets, especially in dynamic market conditions?
Defensibility and IP in generative AI: Given the rapidly evolving landscape of generative AI, how do you assess and ensure defensibility in this domain? What measures are in place to safeguard intellectual property (IP) in the world of generative AI, considering the competitive and innovative nature of the field?
Grace Isford, partner, Lux Capital: How are you differentiating AI startups from each other?
Sophie Bakalar, partner, Collab Fund: The most frequent question is: “What should I do about AI?” LPs are also curious about valuations, market conditions, and how the higher cost of capital is impacting startups’ runway.
Ed Sim, founder and managing partner, Boldstart: Institutional LPs want to know if VCs are writing down portfolio valuations, and whether there is more pain to come. LPs also want to understand the key drivers and whether the metrics are there to continue driving performance.
Marc Steven Schröder, co-founder and managing partner, MGV: Most LPs are interested in when the pendulum will begin to shift and how they can time it perfectly. Many LPs are also limited due to the lower capital returns they received this year. These LPs don’t like sitting on the sidelines, so they want to know when capital returns will increase and when they’ll be comfortable distributing more capital to the space.
Are LPs impatient for liquidity?
Matt Cohen, founder and managing partner, Ripple Ventures: Most long-term LPs understand how long it takes and aren’t forcing it. Only tourist LPs like high-net-worth individuals or angels are asking about liquidity given this is their first time investing in funds.
Jai Das, president, partner and co-founder, Sapphire Ventures: LPs are not impatient about liquidity, but they are asking their GPs to actively look for exits for their investments. Some LPs are also looking at secondary buyers to offload their entire investment in a fund. We already started to see this in 2023, but there will be many more secondary transactions in 2024.
Sailesh Ramakrishnan, managing partner and co-founder, Rocketship.vc: While they are interested in liquidity, it’s more about them not willing to take on any new commitments until they see how the funds raised in the last few years perform.
What will happen to AI investing in 2024?
Eric Bahn, co-founder and general partner, Hustle Fund: A lot of AI companies are going to start to fail in 2024. Most of the VC market has not formed strong theses on what will work in AI, as it all sort of happened a bit quickly. Many deployed too quickly into this space without a strategy. This is sort of like how all those GPT wrapper companies recently went extinct due to OpenAI essentially releasing GPTs that make wrapper businesses undifferentiated. A bunch of investors lost money on their bets in this space.
Kirby Winfield, founding general partner, Ascend: Increased focus on “SaaS 3.0”: Applied AI with proprietary models and no reliance on OpenAI et al., where novel tech allows for reimagined approaches to vertical industry problems unsolved by incumbents.
Rob Rueckert, partner, Sorenson Capital Partners: AI as a theme is already starting to cool. AI will continue to be a widely used technology, but in 2024, it will be more like an ingredient in most companies’ software and less of a standalone category, except for a small handful of AI-specific companies. Either way, AI won’t be the buzzy topic that it was in the first half of 2023.
Pradeep Tagare, head of investments, National Grid Partners: The strong will get stronger and the weak will get weaker. Some sort of investor sanity will prevail. Valuations will fall in line with equivalent SaaS comparables. Many AI enterprise companies will find it difficult to raise the next round of funding. Overall, the sector will keep growing exponentially, both in terms of the number of companies and dollars invested.
Simon Wu, partner, Cathay Innovation: For now, we will continue to see most of the money accumulating in infrastructure. There will be some growth in tooling and horizontal apps (e.g. video and images), as those enable a broader solution.
Don Butler, managing director, Thomvest Ventures: I think 2024 will be one of the most promising years for AI investing. While there has been a bubble building in this space, 2024 and 2025 will be when some of the most interesting companies of the next generation will be started.
If we look back at prior shifts in technology, such as the introduction of the iPhone, we’ve seen a pattern that has repeated: The most interesting companies that take advantage of such shifts are typically started one to three years after such technologies are introduced.
Grace Isford, partner, Lux Capital: We will see deepened investment at the intersection of AI and the sciences — i.e. growth of models trained specifically for material sciences, physics, mathematics, biology and chemistry, and startups verticalizing to focus on AI applications in those fields.
Andrew Van Nest, managing partner, Exceptional Capital: Enough time will have passed for demonstrated ROI to be measurable, and we’ll see how it affects the bottom line for buyers in terms of true value and efficiency. We’ll understand where it makes sense to deploy AI within the enterprise.
Kevin Lalande, managing director, Santė: The hype surrounding AI, like the hype that surrounded the PC in the ’80s and the internet in the ’90s, is justified. We believe the technology will be every bit as transformative. But like the PC and internet, there will be a few big winners and many, many losers. For 2024, we are specifically focused on opportunities where the proper application of LMMs can significantly improve the balance sheet and income statements of companies that are not in the IT Industry.
Sarah Guo, founder, Conviction: Many investors are essentially sitting the market out because of the high uncertainty. Given the real value creation, that is and will continue to be a mistake in 2024. There will also be more opportunity for growth investors as early contenders mature.
We also expect to see more enterprise adoption. Customer buying behavior will mature, from initial interest and strong top-down mandate from leaders to “incorporate AI” in 2023, to more sophisticated evaluation and broader operationalization of AI products in 2024.
What prediction did you get wrong in 2023, but think will get right in 2024?
Kirby Winfield, founding general partner, Ascend: I thought more companies would go under. Pretty sure the failure rate in 2024 will be twice that of 2023.
Rachel ten Brink, founder and general partner, Red Bike Capital: I expected founders to adapt more quickly to the “new normal” in 2023. I am surprised how often I still talk to founders who have valuation expectations that are completely out of whack with their traction and current benchmarks. They tend to have a general attitude that feels so off in this economic climate. Many raised in 2021 at the peak of the market and have held off raising, but even if they raised large pre-seed and seed rounds, they are now running out of runway and will need to adapt.
Maria Buitron, principal, Piva Capital: I keep waiting for there to be more innovation around water, and I expected 2023 would be the year where we would finally see the impact of record-breaking droughts, floods and hurricanes reflected in new startups tackling those challenges.
Historically, building a profitable business in the water sector has been tremendously challenging. I’m keeping my fingers crossed that we will see more founders rise to the challenge in 2024.
Michael Marks, founding managing partner, Celesta Capital: We did not expect the contraction in available capital to be so strong in 2023, assuming it would take longer to correct the market. We expect that to continue in 2024 despite the improvement in stock markets.
OMERS: We thought there would be more innovation within B2B SaaS. With established incumbents and tightening wallets, it has remained a difficult market longer than we expected. And we haven’t seen valuations come down as much as they should have, in light of that.
Jon Lehr, general partner and co-founder, Work-Bench: I had hoped that growth firms would become active again in the second half of 2023, having completed their portfolio triage work and sitting on dry powder. Looking at how 2023 played out, I underestimated how much shell shock investors would have from their 2021 peak deployments, and potentially how high the bar was in 2023 for new investment opportunities given the pressure to extend their fund deployment cycles.
Leslie Feinzaig, founder and general partner, Graham & Walker: The great correction has only just begun. I think 2024 will be the year when companies that were hot in the boom times will finally sink or swim. Runways are running out, VCs are done (or close to done) with extensions, and exits are very hard to come by. My guess is we’ll see the majority of the shakeout happen next year.