Silicon Valley’s venture capital firms are finding it relatively easy to identify promising startups to support, but the real challenge lies in turning their investments into returns. In 2023, U.S. venture firms returned just $26 billion worth of shares to their investors, the lowest figure since 2011, according to data from PitchBook. So far, 2024 appears to be continuing this trend, marked by substantial investments but limited exits through acquisitions or initial public offerings (IPOs).
Thomas Laffont, co-founder of investment firm Coatue Management, recently expressed the industry’s struggles, stating, “We’ve raised a lot of money, and we’ve given very little back. We are bleeding cash as an industry.” Last year, venture firms in the U.S. invested $60 billion more than they returned to investors—a record gap in PitchBook’s 26 years of data collection. As a result, entities like university endowments and pension funds, which often back venture capital (VC) firms, are not reaping the profits they once expected.
This downturn is particularly striking given the high levels of VC activity in recent years. The past three years have seen record-breaking investments by VC firms, with 2021, 2022, and 2023 standing as the most active years since 1998. Much of this capital has flowed into artificial intelligence (AI) startups, a sector experiencing skyrocketing valuations. However, these companies often burn through cash rapidly to develop cutting-edge technologies, exacerbating the industry’s cash flow issues.
Hope for Regulatory Changes
Some investors are pinning their hopes on potential regulatory shifts under the incoming Trump administration, expecting it to foster a more deal-friendly environment. In particular, the appointment of business-oriented regulators could encourage mergers and acquisitions (M&A). Alex Clayton, a partner at Meritech Capital, noted that many investors are betting on a free-market approach to M&A under the new administration, though whether this expectation will materialize remains uncertain. Current policies under Federal Trade Commission Chair Lina Khan, appointed by President Biden, have been viewed as obstructive to tech dealmaking.
IPO Challenges
Historically, startups turned to IPOs a few years after their founding to raise significant funds that were not available in private markets. Public listings also provided employees with opportunities to sell their shares. However, the dynamics of the venture capital landscape have shifted. The growth of VC firms, both in size and resources, has made IPOs less urgent. Many firms now have the capacity to provide startups with continuous funding while facilitating employee share buyouts through tender offers.
At the same time, public market investors have shown diminished enthusiasm for tech startups. Instead, they are reaping significant returns from established tech giants that have surged in value, largely due to advancements in AI. This shift in investor preference has left many startups struggling to generate the same level of interest in public markets.
Currently, there are over 1,400 startups valued at $1 billion or more—commonly referred to as unicorns—according to a recent Coatue presentation. These companies have investors eagerly awaiting exits, but delays in public listings have stretched beyond historic norms. Bill Gurley, a partner at Benchmark, highlighted the unprecedented nature of this trend, noting that some companies are now 13 to 15 years old. Coatue estimated that even if tech IPOs resumed at their historical pace, it would take over 20 years for all these unicorns to go public.
OpenAI and Investor Expectations
One high-profile example of this tension is OpenAI, which recently raised a record $6.6 billion, giving it a valuation of $157 billion. This fundraising success has intensified calls for the company to pursue an IPO. Brad Gerstner, founder of investment firm Altimeter, expressed his expectations during a recent tech conference, saying, “I hope and expect that the next step for OpenAI would be to go public.” His firm contributed $250 million to OpenAI’s latest funding round.
Despite the broader challenges, there are glimmers of hope in the market. The software startup ServiceTitan plans to go public in December, according to insiders, and Swedish fintech firm Klarna recently filed for a U.S. IPO. Both companies are backed by Silicon Valley venture firms, offering a potential avenue for returns.
However, these isolated cases are far from enough to offset the broader stagnation in venture capital exits. For many in the industry, the focus remains on navigating this challenging landscape, balancing the need for innovation with the imperative to deliver returns to investors. Until market conditions improve or regulatory changes unlock more opportunities, Silicon Valley’s venture capitalists will continue to grapple with the difficulties of turning promising investments into tangible profits.