Despite the stock market’s resurgence and anticipated declines in interest rates, the outlook for the tech industry appears less optimistic. In contrast to previous years, the tech ecosystem seems out of sync with the broader economic landscape. Challenges include a predominantly closed tech IPO window, investor liquidity constraints, and numerous startups encountering difficulties in securing capital. The prevailing question revolves around the prospects for 2024.
Conversations with prominent venture capitalists (VCs), Limited Partners (LPs) investing in VC firms, and other experts shed light on their perspectives. Insights ranged from predictions about the fundraising environment in the coming year to the criteria LPs will prioritize in new commitments. Discussions also touched on expectations for the VC secondaries market and the ongoing debate over whether AI represents a genuine opportunity or is merely overhyped.
Perhaps the most notable revelation was the divergence of opinions and the absence of a consensus regarding what lies ahead in 2024. Will it prove to be a fruitful year for VC, or is the tech rebound merely trailing behind the public markets? The uncertainty lingers, leaving open the question of whether stormy seas await the tech industry.
#1. We will see the great VC resignation
“The era of the ‘VC exodus’ has begun, with numerous investors acknowledging the challenging task of securing new funds and a prolonged timeline to liquidity. On a positive note, this shake-out proves beneficial for the ecosystem, serving as a remedy to the hype cycle fueled by an excess of capital in the system.”
#2: Record amounts of dry powder will put downward pressure on returns
“The rise in capital raised, and therefore left to deploy, was driven by the bull-run of VC returns between 2010 and 2015. Since 2015, venture capital dry powder has increased by 385%. In the period between 2010 and 2015, 1st quartile managers achieved >3.0x TVPI across in each vintage. In 2024, record amounts of dry powder, or committed but unallocated capital that firms have on hand, will put downward pressure on returns as investors chase deals in a bid to deploy capital.”
#3: 2024 will prove to be a year of critical importance for managing bias
As elections unfold in forty nations, heightened market uncertainty and geopolitical tensions are expected to amplify biases in the field. The expanding influence of AI necessitates substantial advancements in mitigating bias in machine learning, ensuring that impact sectors progress rapidly and equitably for diverse populations. Fund managers will face the challenge of maintaining resilience and adhering to strategies that address bias, all while striving for optimal impact and returns in this evolving landscape.
#4: 2024 will be a banner year for tech M&A
“In the realm of technology, 2024 is poised to become a landmark year for mergers and acquisitions. Startups, grappling with challenges in fundraising amid elevated interest rates and cautious VC valuations, may find selling to be the most appealing—and diplomatically prudent—choice.
Conversely, public and sizable private tech enterprises will be enthusiastic about utilizing their robust balance sheets and abundant capital access to pursue acquisitions. The goal: organically expand customer bases, enhance adjacent product portfolios, and secure vital distribution channels and partnerships.”
“Driven by a need for liquidity, we will see an increase in VC secondaries. We will also see the corresponding re-setting of price expectations needed for transactions to clear the market.”
— Sunaina Sinha, Global Head, Private Capital Advisory, Raymond James
#6: The investors entrenched in the ecosystem will have access to the best secondary opportunities
“For 2024, I’m a firm believer that despite there likely being an increase in VC secondary opportunities, it will really be people entrenched in the ecosystem who will be able to access the best deals by the disparity of information they possess.
Having transparency on how assets are actually performing, through strong relationships with both entrepreneurs and GPs, will allow more accurate pricing and proprietary sourcing of the best deals.”
— Chloe Dagnell, Principal, Isomer Capital
#7: We will see a rebound in VC fundraising
“In the upcoming year, we anticipate a resurgence in VC fundraising following the challenges of 2023. However, it’s crucial to manage expectations, as fundraising is not projected to reach the peaks seen in 2020 and 2021. Fund managers will persist in encountering difficulties in securing commitments. The data for 2023 suggests a significant decline, with an approximate 50% drop in the number of funds raised and a roughly 60% decrease in total capital raised compared to 2022.”
— Sunaina Sinha, Global Head, Private Capital Advisory, Raymond James.
#8: Next-gen family office leadership will champion more VC commitments
“The number of family offices has surged over tenfold since 2008, emerging as a crucial source of capital for founders and fund managers amidst the current market deceleration.
In the midst of this, we find ourselves amid the most significant intergenerational wealth transfer in history. I posit that the upcoming wave of next-gen family office leaders, particularly tech-influenced millennials, will drive increased venture capital activity in 2024 and beyond. Notably, many of us are committed to generating top-quartile returns while aligning our investment portfolios with our values.
On a broader scale, I anticipate a more robust venture ecosystem for everyone once the IPO market fully reopens
#9: New managers starting VC firms will increasingly be spin-outs from big firms
“Over the upcoming year, I foresee a consistent influx of new fund managers launching firms, with a growing proportion hailing from established brands rather than primarily operational backgrounds. Anticipating a hunger and drive among these managers, I believe this trend will prove advantageous for founders, especially after experiencing years dominated by casual investors. This shift is likely to exert competitive pressure on established investors, compelling them to elevate their performance.”
— Lisa Cawley, Managing Director, Screendoor.
#10: 2024 will be the year of the hyper-specialist VC
“Get ready for the era of the hyper-specialist VC in 2024. In a landscape where conviction is a rare commodity, and investment decisions aren’t swayed by FOMO, specialists equipped to navigate this market will stand out. As capital allocated to VC sees a substantial decrease in 2023, the dynamics of supply and demand are tilting in favor of GPs with available capital. These specialists, adept at prudent selection and mindful of entry prices, hold the key to unlocking remarkable returns, even as the number of GPs actively investing may see a significant reduction.”
— James Heath, Investment Principal, dara5.
Source: Forbes