The state of venture capital: A look back at Q3 2023

In our Q2 2023 update, we debated whether the apparent return of capital flowing back into venture funds marked Q1 as the end of the venture capital market’s decline. In Q1, venture funds raised $11.7B, equalling the record low of Q4 2022. There was a significant upswing in Q2 2023, with funds raising $ 21.6B, giving hope to VC managers that LP money was finally starting to flow back into the space.

Unfortunately, Pitchbook’s Q3 numbers have rendered any such hope as premature. The $9.4B raised in the quarter is a 56% decline from the previous quarter and a nearly decade-long low in terms of capital raised by venture funds.

Q2 2023 saw 134 funds record a successful first close—up from the 99 funds in Q1—the first quarter in over a decade with more than 100 new funds. In Q3, we were looking for further growth but instead saw a 17% decline as the number of new funds closed dipped to 111.

Combined with the total capital raised, the average fund size was $84.7MM, a 56% decline on Q2’s average size of $161MM and significantly down from Q1 2022, which saw 199 funds with a record-high average fund size of $371MM.

While 111 funds with a successful close is still above Q1’s low, the lower average size of the funds further demonstrates the disconnect between GPs looking to raise capital and LPs allocating capital to the venture space.

Q2 2023 was the 6th consecutive quarter with a decline in total exit value. The $6.6B was dramatically down from the high of Q2 2021’s figure of $267.1B. Going into Q3 2023, few expected this downward trend to reverse significantly, but there appears to be the beginning of an IPO comeback headed by the grocery delivery giant, Instacart. Intsacart’s IPO saw the first significant venture capital-backed company go public since Q4 of 2021—even if its IPO value was roughly a quarter of its 2021 private capital valuation. September also saw Arm Holdings & Klaviyo go public in a busy end to the quarter.

With over $35B in total exit value, Q3 beat all expectations and gives us hope that there is some light at the end of the tunnel for the exit community. Deal numbers also remain somewhat healthy, and although the estimated 284 deals continue a trend of eight consecutive down quarters, it is not significantly down on Q2’s estimated deal count of 298.

Q3 was a mixed quarter for the VC industry. A return to IPO activity and a roaring return in total exit value are undoubtedly positive signals. Yet on the fundraising side, the number of new funds and the total capital raised demonstrate the continued frustrations that GPs face when raising capital. All eyes are now on the final quarter of 2023, which will wrap up what has been an up-and-down year for the venture space.