The state of venture capital: A look back at Q4 2023

Q4 brought a close to a particularly turbulent year for the venture capital space. In nearly all measurable metrics, figures were down from the inflated highs of 2021. Add to this the unexpected banking crisis in March that tore through the heart of the industry—affecting key players like Silicon Valley Bank, First Republic, and Signature Bank—and many VC professionals are breathing a collective sigh of relief as 2023 fades into the rearview mirror.

All eyes were waiting on the Q4 2023 PitchBook NVCA Venture Monitor First Look for a number of reasons. Would the rebound in exit value, observed in Q3, carry through to a robust Q4? Could VC-backed exits potentially reach a five-quarter peak? And would the number of VC funds with successful closes and the capital raised by these funds signal an optimistic end to the year?

Here’s what the final numbers from 2023 have to say about the state of venture capital.

As we explored in last quarter's update, Q3 saw a wave of optimism return to the venture market and hinted at a possible turnaround. After six consecutive quarters of decline, the exit value of $38B in Q3 was a nearly 400% surge from Q2. IPO activity, led by grocery delivery giant Instacart, injected vitality into the venture-backed exit market. Yet, any aspirations for momentum were dashed in Q4, which witnessed an 82% plunge in exit value to a mere $6.7B. Q4 2023 is now the worst quarter since Q1 2013 regarding exit values.

Although Q3 saw a sharp rise in exit value, the number of VC-backed exits continued its downward trend. This downward trajectory extended into Q4. With an anticipated count of only 253 exits, Q4 risks becoming the lowest quarter in the total number of exits since Q2 2020.

In a recent TechCrunch survey of venture capital investors, “the vast majority of [participants] responded that they think exit volume will be higher in 2024 than in 2023 and 2022.” Achieving this would demand quarterly averages in 2024 of 283 exits to surpass 2023 and 350 to outperform 2022. At Juniper Square, we’re cautiously leaning towards the former being possible while acknowledging the latter’s improbability.

With our quarterly State of VC updates, monitoring the capital raised by venture capital funds remains paramount. Q3 2023 sparked concern with a dip below $10B—the first quarter to hit this low since 2017. Despite the fact that only $66.9B was raised by VC funds in 2023, marking the lowest annual figure since 2017 and a significant drop from the 2022 heights of $172.8BN, Q4 displayed a 157% QoQ surge to hit a five-quarter high of $24.2B. If this quarterly average had sustained throughout the year, 2023 would have ranked the third-highest year for VC fund capital raised. It will be interesting to look at the Q1 figures to see if this momentum can be maintained, especially as 2024's fundraising prospects face added complexity due to LP uncertainty around what’s expected to be a turbulent presidential election year.

The final data point in our Q4 update is the number of new venture funds with a successful close, which remains on a relatively stagnant trajectory. Despite the increase in total capital raised by VC funds, the data doesn’t reflect a proportional surge in the number of new funds. While Q4 showcased a 157% increase in capital raised, the number of new funds only saw a 17% rise. This resulted in an average fund size of $186MM, another five-quarter high, signaling LPs prefer to invest in established managers over first-time fund managers.

Despite the lackluster numbers, it’s important to remember that venture capital plays a vital role in driving forward the leaders of tomorrow. Certain investment sectors are still alive with potential. Technology continues to be the heartbeat of the venture space, with new niches capturing considerable momentum. Artificial Intelligence (AI) and Machine Learning (ML) remain perennial favorites, driven by their transformative potential across industries, from finance to healthcare and beyond.

In Q1 of 2024, Apple will release its long-anticipated virtual headset, driving further attention to virtual and augmented reality. This is another area that will continue to capture imaginations and investments, and the technology promises disruptive advancements in entertainment, communication, and even e-commerce experiences.

The biotech and healthtech sectors are witnessing a surge in interest as we enter an era of more personalized medicine and prevention. Add to this climatetech and sustainability-focused startups, and the opportunity for outsized returns from venture-backed firms becomes evident as these growing sectors align with broader societal shifts and technological advancements, signaling the long-term potential for impactful innovations.

Reflecting on our Q4 2022 prediction of “truly choppy waters” for 2023, the year largely unfolded as anticipated. The obvious headwinds of rising interest rates, declining valuations, costlier debt, and a dwindling number of exits resulted in a turbulent landscape. If 2023 is perceived as a correction following the unprecedented highs of 2020 and 2021, the fundraising efforts within such headwinds might not appear entirely unhealthy.

The most concerning aspect of 2023 remains the lack of exit value, standing at $61.5B—less than 10% of the 2021 peak and less than half of the 2018 figure. As we tread into 2024, exit numbers and values will face scrutiny as the industry strives to regain its pre-pandemic momentum.