2024 Mid-year Private Investment Outlook

8 emerging venture capital trends

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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

This is an excerpt from our Investment Outlook, in which specialists from across our investment platform share insights on the economic and market forces that we expect to influence portfolios. This is an article in the Private Investment Outlook section.

The venture capital market appears to be gaining momentum heading into the back half of the year. As we wrote in our 2024 outlook, we believe 2023 was best categorized by a general “slowness” as valuations, deployment, fundraising, and exits all reverted to historical levels. 

In contrast, we have seen signs of a recovery in the first half of 2024. The shifts we’re witnessing are gradual, and there are plenty of difficulties to traverse along the way, but we believe we’re navigating a healthier environment for venture capital overall — one where innovative companies are being rewarded for making long-term, prudent decisions. 

While our crystal ball may be as blurry as anyone else’s, we believe eight emerging trends will continue as the year progresses:

1. Capital efficiency surge: Following a decade marked by historically low interest rates, which reached their bottom in recent years, there is a growing emphasis on capital efficiency. This shift will likely result in a number of high-valued start-ups, or “unicorns,” particularly those that secured substantial funding in 2021, struggling to justify past valuations. With investors more judicious about financing, many of these companies may have to accept significant down rounds. Going forward, we believe that far more companies will adapt and build their businesses based on a foundation of better capital efficiency. 

2. LPs will likely prioritize DPI: The venture capital landscape has seen liquidity challenges for some fund managers, causing allocators (limited partners) to be more selective with their investments. That is because, despite a decade of robust activity, including a very favorable liquidity environment in 2020 and 2021, most venture fund managers have returned very little capital to their investors subsequently (Figure 1). Over the past year we have seen interest move from Total Value to Paid-In (TVPI) to Distributed to Paid-In (DPI), and we expect this trend to continue as allocators favor managers who have returned capital.

Figure 1

3. AI valuation and impact: While future developments could justify the prices, the artificial intelligence sector has seen high valuations that are somewhat ahead of revenue generation for many companies in the sector. In our view, valuation has outpaced fundamentals in some segments, leading to a lack of clarity regarding which business models will be significantly monetizable. Nevertheless, we believe the pervasive influence of AI is set to extend across various sectors, not only as a specialized vertical but, perhaps most importantly, as a transformative horizontal technology. In this stage, we currently favor companies where AI serves as an enabler for their existing models. 

4. Emerging sector opportunities: Some sectors such as Software as a Service (SaaS) have been relatively insulated from the new valuation environment due to large cash reserves built up in 2020 and 2021. In the first half of this year, we saw progress toward more reasonable valuations and expect this trend to continue as these companies see the depletion of their cash reserves, leading to the emergence of new opportunities for venture investors. Notably, SaaS multiples still appear to be correcting in the public market, which will likely influence the valuations private companies receive when they come back to the table to raise capital.

Figure 2

5. Rebalancing growth and profitability: There is a growing consensus that the delicate balance between rapid growth and profitability likely needs recalibration. The famous “Rule of 40” blends annual revenue growth and profit margins, aiming for a combined total of 40% or more to ensure attractiveness to investors. It has become clear that balance is a critical factor in this relationship, as 100% growth with -60% margins may not be sustainable. In the context of initial public offerings (IPOs), the current environment suggests that demonstrating profitability is becoming increasingly crucial, marking a shift from the previous growth-at-all-costs mindset.

6. IPO market revival: The IPO market, which has experienced a period of stagnation, is showing signs of modest recovery. We believe it is poised for a more fulsome recovery through the balance of the year with a possible pause around the US elections. While many companies have been hesitant to go public following difficulties faced by companies who IPO’d in 2021, the success of recent IPOs may go a long way in reversing this sentiment. Generally, the IPO market tends to follow the public market, so we would expect that the back half of the year will provide a good opportunity for well-positioned companies to access public markets and capitalize on investor appetite for new equity offerings.

7. Start-up graduation rates: The progression rates from early-stage to growth and then to late-stage growth are projected to decline. Companies will likely be required to exhibit greater scale and a stronger product-market fit to advance through these stages. This heightened scrutiny should help ensure that only the most robust and scalable businesses progress toward late-stage growth and potential exit opportunities.

8. Venture secondaries will likely grow: The venture secondaries market is a small fraction of the buyout market, and the reduced volume has led to larger discounts (68% of NAV in 2023 compared to 91% of NAV for Buyout).1 We believe that allocators rebalancing their portfolio, or needing liquidity, will incentivize more managers to participate in what has been a relatively niche market to date. We expect that the result will be more volume and efficiency in the next few years.

Figure 3

Bottom line on the venture capital outlook

We believe the venture capital environment is continuing to improve. From increased capital efficiency to a recovering IPO market and much more, we’re excited about the trends we see fueling opportunities ahead.

1Jefferies, Global Secondary Market Review, January 2024.

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