Venture Capital Environment

Fourth Quarter 2023

The US economy was estimated to expand at a 2.8% annual pace for the full year 2023, less than the blistering pace of 4.9% growth in Q3 2023. Q3’s growth was primarily driven by higher consumer spending as both interest rates and inflation moderated. Both the equities markets and the bond markets rebounded strongly during Q4 2023 partly reflecting a growing consensus that the Federal Reserve Bank was no longer likely to raise interest rates in early 2024. The S&P 500 and Nasdaq ended the full year 2023 up 24% and 43%, respectively, and the Bloomberg Aggregate Bond Index reported a 6.3% increase in valuation for Q4 2023 and a 5% increase for the full year 2023. GDP growth for 2024 is expected to moderate to between 0.7% (per JPMorgan) to 2.0% (per Goldman Sachs) as consumer spending is likely to be at a more muted pace in 2024, while fiscal spending is also likely to be restrained.

In 2023, all VC deal activity continued to slow down with 3,934 US deals completed during Q4, which was 11% lower than the average quarter in 2022. Deal value also continued to decline, with $171 billion invested across the year, a drop of $72 billion from the 2022 level of $243 billion. The year reflected limited capital availability, and one-third of the investments went into AI companies, making up roughly 20% of the deal count (per Pitchbook). Despite challenging start-up VC markets and increased bankruptcies, over 4,000 new companies raised their first VC investment in 2023.

Pre-seed and seed stages received $2.8 billion across 1,176 deals in Q4. For the full year 2023, pre-seed and seed deal value sharply declined from $24 billion in 2022 to $15 billion in 2023. Early-stage deal value reached $39 billion in 2023, a 44% decline from 2022. Median deal size of $15.4 million declined by 20% year-over-year but remained above pre-pandemic levels. Late-stage deal activity continued to decline with 2023 volume of $80.4 billion across 4,305 deals down significantly compared to 2022 volume of $94.0 billion across 4,687 deals. Only eight companies completed initial public offerings (IPOs) in Q4, with the largest generating $299 million in exit value.

US VC fundraising activity of $67 billion for 2023 reached a six-year low as institutional and angel investors became more cautious during the challenging fundraising environment. While fundraising activities in 2024 are expected to begin a slow recovery, most VC funds don’t expect fundraising activity to reach the peak level achieved in 2021 for many years.

Impact of increasing interest rates

VC valuations were negatively impacted by rising interest rates with a greater decline in valuation for Series B to Series D, and a minimal decline for Seed and Early stages.

Valuations for Series A-D were negatively correlated (at -81%) with changes in interest rates but valuations for Angel and Seed rounds were uncorrelated (negative correlation of 7%) with changes in interest rates.

ROC invests in earlier stage Angel and Seed rounds, which were not materially impacted by rising interest rates.