Why 38 Percent of VCs Disappeared From Dealmaking In 2023

Venture capital firms are not just investing in fewer deals - a significant number are getting out of the business as the macroeconomic environment, the growing concentration in tech and the drought of IPOs has made it less profitable less quickly for many. 

There will always be such cyclical changes, but the past few years have dampened enthusiasm for investing in venture and especially in tech, as the big returns of previous decades become harder to realize. JL 

Marina Temkin reports in Pitchbook:

The number of active investors in US VC, defined as making two or more deals, plummeted 38% in the first three quarters of 2023 compared to last year. That translates to 2,725 fewer firms making deals. This caused the ratio of capital demand to supply to jump  in 2023. The data indicate investors are not merely writing fewer checks. Some dealmakers may have run out of funds and could be 'zombies.' Crossover investors may have stopped allocating to VC assets. Inactive investors could try to sell their VC assets on secondary markets. Or, these firms could be collecting management fees and waiting for startup valuations to rebound. Investors have forecasted the number of VC funds will decrease.Boston-based OpenView stunned the VC world with news in early December that it laid off most of its employees and would stop all new investments months after raising its $570 million seventh fund. The 17-year-old firm, which managed $2.4 billion, was too prominent to keep its closure under wraps.

But OpenView was far from the only investor that stopped backing startups this year. 

The number of active investors in US VC, which we defined as making two or more deals, plummeted by 38% in the first three quarters of 2023 compared to the same period last year, according to PitchBook data. That translates to 2,725 fewer firms making deals.
 

 

The decline in active investors is far higher than the 28% decrease in deal count during the period, the Q3 2023 PitchBook-NVCA Venture Monitor shows.

The data indicates that investors are not merely writing fewer checks. Some dealmakers may have run out of funds and could be deemed zombie funds. Others, such as crossover investors, may have stopped allocating to the VC asset class.

"The decline of active investors has been acutely felt at the later stages, where crossover capital is necessary to close the large check sizes needed for growth," said PitchBook lead analyst Kyle Stanford. The pullback of these large investors caused the ratio of capital demand to supply to jump sharply in 2023.

Inactive investors are likely trying to sell their VC assets on the secondary markets, secondary market participants say. Alternatively, these firms could be collecting management fees and waiting for startup valuations to rebound.

Limited partners and other investors have been forecasting that the number of VC funds will decrease. Even though official firm closings are still rare, the data shows that the playing field has thinned out.