The outlook for US venture capital investments for 2025 looks somewhat stronger than what the market has realized in recent years, according to a report by Pitch book.
In a year-end VC report, Pitchbook said that exits (startups being bought or going public) are expected to increase, and that there should be a moderate increase in the number of large tech companies that hitting public markets can be a big boost to exit value.
And that will encourage reinvestment. Pitchbook said the move will increase spreads and give limited partners the liquidity they need to reinvest into the strategy or rebalance their overall portfolio.
“We've long said that dry powder would continue to do solid deals, and it did to a large extent at seed and early deals,” Pitchbook said. “Not all of these deals were a win for everyone – some mixed with weak structures or built at a significantly lower valuation – but deals were being made. Market conditions should be favorable to VC in some areas, but the bar for development is low. “
The Federal Reserve's (Fed's) rate cut in September started the way forward. As inflation remains low and holds up to further cuts, markets should respond accordingly, and more risk appetite will seep into public markets, prompting tech companies to consider it is now better than ever. There is still uncertainty in the market, and a possible increase in macroeconomic volatility events could continue.
With the Trump administration re-elected, proposed tariffs on goods imported from countries such as China and Mexico could disrupt markets. The administration's handling of the wars in Ukraine and the Middle East, not to mention heightened tensions between the US and China, are also poised to trigger market volatility.
The US economy is pretty much set moving into 2025. Inflation has been on pace to reach the Fed's target level, public markets have seen meaningful gains over the past year , GDP growth is around 2.5% and stable, and unemployment is reasonable. Corporate earnings have also featured strongly in the market. In general, the economic indicators are bullish on consumer confidence, which has been low and has yet to recover from pre-COVID-19 highs.
Venture has marched to its own beat, however. AI has piqued the interest of Wall Street and has attracted the most VC dollars. Late-stage deals and venture growth have slowed in recent years due to a lack of referral investment capital flowing into VC. These institutions felt the pinch of dried up liquidity, but there are many opportunities to invest in companies that were waiting for an IPO, and an increase in listings should also catch on. that capital. The last few years of pain for VC seem to have helped to flush out the current tourist system, as well as the investors who were in VC because it was the “it” thing. to do
As a team, Pitchbook said its outlook for US venture capital is fairly positive for 2025. That doesn't mean challenges are gone. Up and down cycles are likely to continue at higher speeds than the market is used to. More companies are likely to close or drop out of the venture funding cycle.
However, both of these expectations stand as of 2021.
“We don't expect IPO filings to end the year close to around 200 (not including SPACs) that occurred in 2021, but 40% of US unicorns have be in packages for at least nine years, and that group makes up more than. $1 trillion in value. That's a figure that can quickly push exit values and restart the VC machine,” Pitchbook said.
Pitchbook philosophy noted that from 2016 to 2020, the average capital demand-supply ratio for the venture market was about 1.2 times for late-stage companies and 1.4 times for venture-
growth stage companies. This shows that startups consistently needed more capital than investors provided. The venture capital supply-demand ratio measures the balance between the capital used by VC firms and other market participants (supply of capital) and the amount of startups trying to raise capital (demand capital).
A 1x ratio represents a balanced market where supply equals demand. However, for late- and early-stage companies, estimated demand has exceeded supply, driven by their proximity to public markets. By 2023, the demand-supply ratio peaked at 3.5 times for these companies, a huge imbalance in which only $1 million was available for every $3.5 million requested by startups, for example.
This ratio captures the cyclical nature of the enterprise market. During the 2020-2021 boom, near-zero interest rates and an influx of non-traditional investors created unprecedented capital availability, pushing the ratio to a low of 0.6x for growth-stage companies late and enterprising by Q4 2021. As macroeconomic conditions changed, rising interest rates and inflation led to investors non-traditional pulling back, quickly reversing the trend.
By 2023, the supply-demand ratio increased to a record high of 3.5 times, reflecting declining access to capital and increased investor choice. This environment has particularly affected more mature startups, many of which raised large rounds during the 2020-2021 boom and now face challenges in obtaining new funding at comparable valuations. A frozen exit environment has exacerbated these challenges, keeping many companies private. While some stronger startups have raised money, others have faced increasing financial pressure. Outlook: The supply-demand imbalance for late growth and early stage companies will remain above the 2016-2020 trend average.
As things improve, and with a relatively stronger exit market expected, we expect supply-demand ratios to meet 2025 or continue to move above average levels 2016-2020 of 1.2 times for companies at the end of the stage and 1.4 times for enterprise- companies at the growth stage. Using the current inventory of deals, Pitchbook projects the 2016-2020 historical average required monthly observed deal value to reach approximately $15 billion for late-stage companies and $7 billion for enterprise growth stage companies.
Although an expected increase in exit activity next year could restart the venture flywheel, the backlog of private companies and persistent capital constraints suggest that the recovery is likely to be moderate gradually Pitchbook estimates that there are currently 18,000-plus late-stage and venture-growth companies in its inventory, accounting for 32.4% of VC-backed companies—and at least 1,000 companies with VC support has raised another VC round from 2021, said Pitchbook analyst Kyle Stanford.
A key risk lies in any major changes that could bring the supply-demand market closer to equilibrium, moving the ratio away from the expected imbalance. A rapid reopening of the exit market, driven by increased IPO or M&A activity, could release the backlog of later-stage demand, increasing issuance back to LPs. Additionally, as non-traditional investors unload part of their portfolios and as later-stage companies look to restructure in preparation for exit opportunities, there is strong potential for greater involvement of non-traditional investors in the venture.
Historically, VC funds that have deployed capital during recovery phases have provided stronger returns, encouraging further incentive to return to venture. In addition, periods of high liquidity are often associated with faster utilization cycles. If non-traditional investors re-enter the market and traditional venture investors significantly increase deployment speeds, the expected imbalance above demand will be 1.2x and 1.4x-
the supply ratio may not come for late growth stage and enterprise companies, respectively.
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