United States: Where Have All The Venture Capital Firms Gone?

We all know funding for startups has been in short supply over the past year, but a recent PitchBook article points to a large drop in active venture capital investors in the US. They define active investors as those who have made two or more deals, which dropped by 38% in the first three quarters of 2023 compared to the same period last year. That means 2,725 fewer firms are making deals in 2023.

They also point out that the drop in investors exceeds the drop in deal count during the same period, which was 28%. And their data shows it's not just a lack of deals being done; in some cases, funds could have run out or become "zombie funds," and some may have stopped allocating to the VC asset class. These inactive investors might sell VC assets on secondary markets or wait for a rebound valuation.

PitchBook notes that the lack of active investors impacts later-stage startups more as crossover capital is needed due to the large amount of funding required for growth. This has greatly increased the ratio of capital demand to supply this year.

This data is coming at a time when one VC announced its suspension of investing in new companies and a layoff of most of its employees, even after it had raised half a billion dollars. There are numerous reasons why a firm might become inactive, such as fund exhaustion, poor performance, leadership changes, a shift in focus, or regulatory challenges. But one of the most important is market conditions.

Economic downturns and changes in market conditions can have detrimental effects on the overall investment landscape. During the kind of challenging economic conditions we have experienced in 2023, VC firms have become more cautious about entering into any new investments, leading to a perceived period of inactivity.

While the past year has not been easy for startups, the outlook for 2024 is certainly looking brighter, and there is optimism that we could see more funding and maybe an easier road ahead for startup founders. We know there is still a lot of dry powder out there, reportedly at record levels, so it stands to reason that many of these firms will turn the investment back on when the time is right. Meanwhile, it's still time to build.

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