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Quarter-End Insights

Venture Capital Outlook: With Ample Available Capital, Growing Venture Market Is Subject to Inflationary Pressures

We expect startups will continue securing outsize financing as private capital remains abundantly available, giving rise to inflationary market effects.

  • Although the number of deals has leveled out in the past few quarters, startups continue to secure massive financing rounds compared with historical levels.
  • Despite a slight uptick in tech IPOs, exits remain subdued as startups stay private for longer periods, spurring investors to pursue innovative exit routes and secondary activity.
  • As startups command greater sums in initial and follow-on financing, we believe venture fund sizes will continue to grow as managers seek to maintain equity positions and avoid dilution.

As institutional investors continue to search for outperforming asset classes to fulfill future funding obligations, capital has continued to flow into the private markets at an extraordinary rate. Both startups and venture funds have secured unprecedented amounts of capital, with General Catalyst, New Enterprise Associates, and 10 other venture capital firms raising funds of $1 billion or more since 2016. Ample dry powder in venture capital funds has facilitated 129 venture capital rounds larger than $50 million closed in the first quarter alone, a 115% increase year over year. We believe inflated venture funds and financing are a product of a maturing U.S. venture market, with high competition for deals spurred by both domestic and international investors like SoftBank. We also believe this dynamic has led investors to become more selective in their deployments, shifting the entire venture market toward funding fewer but more mature companies at each stage of development.