What Will it Mean for the Innovation Ecosystem if a Recovery in Venture Fundraising Takes Longer than Expected?

Everyone is watching to see when venture fundraising will rebound. There has been much speculation surrounding when it will bounce back, and PitchBook is is now predicting it could be 2028 before we see a real recovery in venture fundraising.  In this post, we explore the prognosis for a recovery and what it could mean for the greater innovation ecosystem.

Venture capital firms, or “VC’s”, experienced massive growth in 2021 through 2022, seeing their assets under management (AUM) grow 58% to $3.8 trillion. Fundraising was a principal driver of that growth; however, after those record-breaking years, venture fundraising has fallen off significantly. PitchBook analysts don’t expect this to recover to those kinds of highs until after 2028. 

The forecast for fundraising this year is significantly lower, less than $200 billion, and a 48% decline from what we experienced in 2021. Growth is expected to be 2.9% annually through 2028, with PitchBook saying that is “half the rate of other private capital strategies, including private equity, private debt, and real assets funds.” To add to this, they point out that this could have a great impact on aggregate assets under management, or AUM, and if valuations remain depressed, VC AUM could remain flat until 2028 or beyond.

One interesting note from their reporting is how the performance and price multiples of emerging tech companies could change that forecast for AUM. They expect VC AUM to grow to $4.6 trillion over the next five years based on current expectations – but if conditions are more favorable than forecasted, that could be closer to $5.6 trillion.

Why is venture fundraising so critical to AUM?

The level of venture fundraising has a direct correlation to the capital available for investment. These firms rely on external fundraising to ensure they have the financial resources they need to invest in startups and emerging companies. Simply put, the more money raised, the more investments they can make. The more investments they can make, the more diversified their portfolios are.

A decrease in fundraising can also impact the operational budget of a venture capital firm, as fundraising is at the core of its business model. Their management fees are often a percentage of their total AUM, so when it decreases, those fees are impacted. This could lead to layoffs, shrinking, or even closures of smaller firms. 

What are the larger implications?

This could, of course, have implications beyond VC firms. Startups feel the biggest impact when funding is not available, facing a difficult road securing initial and follow-on funding and forcing them to rely on existing cash reserves and customer payments. It also directly impacts valuations as companies turn to down rounds and further dilutive equity. Existing portfolio companies may also have difficulties securing later-stage funding, thus impeding their growth. 

This could also lead to an uptick in strategic acquisitions as startups look to mergers or acquisitions as a means of survival. As we have previously blogged, the venture capital fundraises of 2024 are closely tied to consolidation and acqui-hire strategies.  

There is also the possibility that decreased available venture funding could drive startups to favor profitability over growth.  In times of limited funding, a startup will often shift focus away from a growth strategy with a greater focus on profitability.  While the correlation of profitability to value has increased by a factor of two since early 2022, growth remains the biggest driver of valuation.  Boiling it down:  favoring profitability over growth will keep valuations depressed, a self-fulfilling prophecy.

Will this be a long five years for VC firms?

The analysts at PitchBook have reviewed extensive data and industry information to come to this conclusion. And while no one has a crystal ball, the recovery here is probably going to be longer than most of us would like. This is an area we will be monitoring closely.