Samira Assessment
While we have mostly been discussing fundraising from the perspective of startups, today, we want to dive deeper into current dynamics and trends within VC funds. A few weeks ago, Carta published its VC fund performance report.
The three major findings were:
- Slow capital deployment: At the 24-month mark, funds in the 2022 vintage had deployed about 43% of their committed capital, the lowest share of any analyzed vintage. Prior vintages ranged from 47% % to 60% after 24 months
- Graduation rates are declining: 30.6% of companies that raised a seed round in Q1 2018 made it to Series A within two years, compared to 15.4% of Q1 2022 seed startups in the same timeframe
- Distributions back to LPs remain elusive: After three years, less than 10% of 2021 funds have had any DPI
While shareholders within the industry are likely feeling the increase in dry powder and the decrease in graduation rates, the tremendous decline in DPI was less transparent until the graph below started trending across social media and gained a lot of attention.
This graph highlights a scary development. 40% of 2018 vintage funds don’t account for any DPI (Distributions to Paid-In capital, calculated by dividing the total distributions made to LPs by the total capital they have paid into the fund). In this case, we are not talking about a DPI that is smaller than one, but a DPI of zero – meaning 40% of 2018 vintage funds haven’t returned any capital to their LPs. Adding on to that, some experts are saying that the situation will be even worse for 2020-2022 vintages.
The situation highlighted in the graph above shows a problem within the industry. Yes, we can agree that IPOs are not really happening at the moment, and M&A valuations are down – but they exist. The issue is that M&A valuations are simply not aligned with the high valuations paid by VCs, and this valuation gap often complicates exits.
What we see is that most VCs recognize this and are currently preparing their companies to become acquisition-ready. Besides strategic acquirers, who have still been active in recent periods, quite a lot of tech-focused PE firms are on the lookout for promising companies to join their portfolio. Therefore, we are expecting the number of exits from VC funds to steadily increase over the next few years, but on a more realistic valuation level than before the VC boom. While this discrepancy is currently challenging to navigate for all players involved, overall, closing this valuation gap will make the industry way more resilient and sustainable.
Global deal value is increasing, especially due to USD +1Bn deals
Analyzing the global Aggregate Deal Value for early-stage investments reveals a slight but consistent increase since Q4’23. In contrast, late-stage deals experienced a modest decline from Q4’23 to Q1’24, followed by a significant surge of 38.1% from Q1 to Q2 2024. This sharp increase is primarily driven by the rise in USD +1Bn VC transactions during Q2’24.
Most macroeconomic indicators point to a soft landing, as consumers, businesses, and markets have handled inflation, elevated labor costs, and higher-for-longer interest rates much better than expected. With rising equity markets and low volatility, the capital markets engine is restarting. The market likely has bottomed out, and companies that raised two to three years ago and had pushed out financing through cost-cutting measures are returning to the market for subsequent financing
Globally, nearly ten companies attracted USD +1Bn VC deals in Q2’24, more than double the number seen in Q1’24 and was the second largest quarter of USD +1Bn mega-deals on record. The Americas accounted for the largest share of these deals, including an USD 8.6Bn raise by CoreWeave a USD 6Bn raise by xAI, a USD 1.2Bn raise by Juul, and USD 1Bn raises by Scale AI, Wiz, and Xaira Therapeutics — all within the US. The Asia-Pacific region saw two raises by e-commerce companies — a USD 1.96Bn raise by Singapore-based Lazada and a USD 1Bn raise by India-based Flipkart, while Europe saw UK-based Wayve raise USD 1Bn. UK-based Abound also raised USD 999.6 Mn during the quarter.
Rising check sizes reflect the market’s shift toward experienced players
A parallel trend is observed in average check sizes per deal, with early-stage investments showing steady growth, while late-stage deals have experienced a significant surge between Q1’24 and Q2’24.
This shift towards larger check sizes reflects the intensifying competition in the market. While capital continues to flow, there is also heightened scrutiny from investors. LPs are becoming increasingly selective, prioritizing funds with strong track records, clear differentiation, and robust value-add strategies.
As the market finds its footing, there has been a notable trend toward larger check sizes, both from LPs to GPs and from GPs to founders. While a variety of possible explanations exist, the most likely answer is that market players are placing a premium on confidence. Whether it is with established managers or founders with a successful track record, the market is investing in experience as it charts a new path forward.
Valuation divergence between early- and late-stage companies
Upon closer examination of PM valuations, early-stage companies are encountering challenges in securing funding at valuations comparable to previous years. In contrast, late-stage companies have seen a notable 65.2% increase in PM valuations from Q1’24 to Q2’24.
Source: Preqin May 2024
This divergence can be attributed to the stronger market position of larger companies with established track records, which allows them to command higher valuations even in a challenging environment. Conversely, early-stage companies face greater investor skepticism, reflecting a broader trend of heightened caution and risk aversion in the current investment landscape.
Generally, the market has bottomed out and valuations are rebounding—but those up rounds are concentrated within a small cohort of high-growth startups, while middle-of-the-road startups are struggling. A significant number of companies have not raised a follow-on round since 2021. Those historic valuations are unlikely to be fully supported in the current environment—an overhang we expect to be worked through over the coming quarters
At the end of the day, the IPO market is a growth market, and growth rates continue to be a key valuation driver. Across cohorts, companies with stronger growth profiles consistently garner higher valuations than their lower-growth peers.
Funding Highlights
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