| You're receiving Dealmaker for free. Upgrade to a paid subscription to access all of our award-winning tech and business journalism. Subscribe to The Information here for 25% off your first year (normally $399). Welcome back! The artificial intelligence boom has provided a nice distraction from the reality of the venture capital industry, where cracks beneath the surface continue to grow. The latest edition of PitchBook's quarterly report on the venture business paints a concerning portrait and offers a bleak projection: "the dam created by the headwinds of high interest rates and inflation will eventually crack." Here are five data points from the new report that jumped out at me: - The number of private companies in existence has reached a record-high of 57,674. Late-stage companies, many of which would have already gone public in a more favorable market, make up 32% of that total. That portion has been relatively stable over the last three years but the sheer number of these late-stage startups has shot up, given the proliferation of private companies.
- Distributions, or the VC metric that measures money returned to limited partners relative to capital raised, are as low as they were during the 2008 financial crisis, a troubling sign for the venture capitalists hoping to raise new funds. Distributions have been in the single-digits for eight quarters straight, according to the data, compared to the average quarterly rate over the last decade of 16.8%.
- Unsurprisingly, the rate of capital calls—when a venture capitalist asks their backers to wire them money they committed—has slowed. Venture capitalists are understandably wary of asking for capital when they've not returned money themselves in some time.
- A number of investment firms continue to wait on the sidelines, recovering from the zero interest rate policy era of 2021. The number of investors who made at least one startup investment in the first three quarters of this year is fewer than half the number that made new investments in 2021.
- OpenAI co-founder Ilya Sutskevar's $1 billion raise in September represented 20% of first-time fundings in the third quarter, a staggering statistic that shows how dominant AI financings are and how much of the ecosystem's capital is exclusively chasing AI veterans.
Startups are expected to raise a total of $175 billion this year, far below the $352 billion record set in 2021. The Federal Reserve's recent 50 basis point cut to interest rates has made investors and bankers optimistic that startup IPOs will pick up. But that's far from enough to prevent that dam from breaking. When it does, expect many more startups to agree to mergers that provide little if any capital to their employees and investors—if they can avoid shutting down altogether. |
