Venture Capital Environment

Fourth Quarter 2024

During the fourth quarter of 2024, GDP increased by 2.3%, which was substantially lower than the second quarter’s 3.0% growth rate and the third quarter’s 3.1% growth rate. As expected by the financial markets, the Federal Reserve Bank (the “Fed”) reduced the federal funds rate by 25 bp in December to 450-475 which was in addition to the 50 basis points reduction in September 2024, reflecting the Fed’s reduced level of concerns regarding inflation. The effects of lower interest rates should have a positive impact on public and private equity markets, including venture capital investing. Recent economic indicators point to a slower pace of interest rate cuts in 2025, reflecting a combination of continued economic growth and higher than expected inflation. The unemployment rate held steady at 4.1% in December 2024. After a slight increase earlier in the year, unemployment has remained in the 4.1% to 4.2% range for the past seven months, showcasing the resilience of the US economy.

The equity markets and venture capital markets are facing a volatile environment in 2025, reflecting the change in administration. The President’s threats on implementing new tariffs on trading partners could increase inflation and decrease GDP growth. Venture funding is expected to surge in crypto, healthcare, and traditional energy sectors, with a focus on deregulation and innovation, but renewable energy projects may face reduced subsidies under the President’s policies.

Venture Market Update

2024 venture capital deal value reached $209 billion, representing a 30% increase from 2023’s deal value of $161 billion. The number of venture capital deals also rose to 15,260, a 4% increase from the 14,712 deals closed in 2023. Venture-backed AI companies were the primary drivers of increasing deal sizes and valuations in 2024. Per Pitchbook, pre-money valuations during 2024 rebounded by an average of 40% from 2023.

Despite this growth, there were only 40 exits valued at $500 million or more in 2024, a stark contrast to the 220 such exits in 2021. The number of active companies with valuations exceeding $500 million grew by approximately 40% during this period, highlighting a challenge for the market as substantial value remains locked in illiquid securities. In 2024, start-ups continued the trend of staying private for extended periods. As a result, a significant portion of venture capital value remains tied up in older, more mature companies.

Median VC pre-money valuation ($M) by series