In spite of hot artificial intelligence startups receiving substantial investment rounds at high valuations, the overall venture funding environment remains cold. The volume of U.S. venture investments in the first quarter dropped to its lowest level since 2017, according to data from PitchBook. This trend was reflected globally, with worldwide volume hitting its lowest point since 2016 and total deal value dropping to levels not seen since 2019.
The lack of dealmaking indicates that, despite a rebound in tech stocks last year and ongoing excitement surrounding generative AI, venture capitalists are mostly staying on the sidelines. Start-up financings reached record highs in 2021 before slowing down significantly in the following years due to concerns about inflation and rising interest rates. This led investors to seek safer assets and prompted money-losing tech companies to prioritize efficiency over growth.
Although the Federal Reserve has hinted at potential interest rate cuts in 2024, they have remained stable for now. Fed Chairman Jerome Powell mentioned that policymakers need time to assess the current state of inflation before deciding on rate cuts, adding uncertainty to the timing of such actions.
PitchBook analysts noted that sticky inflation has pushed expectations of interest rate cuts to the latter part of the year, while the possibility of a recession looms. They do not anticipate a significant increase in deal activity in the near future.
In the first quarter, there were 2,882 venture deals, the lowest since the third quarter of 2017, totaling $36.6 billion, a 62% decrease from the peak in the fourth quarter of 2021. Globally, there were 7,520 deals, the fewest since the third quarter of 2016, with investments at $75.9 billion, the lowest since mid-2019. VCs worldwide have struggled to return funds to limited partners over the past two years, making many hesitant to reinvest.
Positive signs for the market came through IPOs, with companies like Reddit and Astera Labs making their debuts in March, becoming the first venture-backed tech companies to go public in the U.S. since September. Rubrik, a data security software vendor, filed its IPO prospectus this week.
The PitchBook analysts highlighted that Reddit and Astera comprised 73.4% of the total exit value in the U.S. for the first quarter. The prospect of increased IPO activity generated excitement in the market narrative due to the sluggish pace of exits in the past two years.
Despite hot artificial intelligence startups raising large investments at high valuations, the overall venture funding environment is currently experiencing a downturn. In the first quarter of this year, U.S. venture investment deal volume reached its lowest level since 2017, with a similar trend seen worldwide. This decline in dealmaking can be attributed to factors such as inflationary concerns, rising interest rates, and a focus on efficiency over growth among tech companies. The Federal Reserve has hinted at potential interest rate cuts in 2024, but the timing remains uncertain. With 2,882 venture deals totaling $36.6 billion in Q1, the market is slow, with VCs hesitant to reinvest due to difficulties in returning funds to limited partners. However, there are some positive signs, such as Reddit and Astera Labs making successful IPO debuts, signaling a potential increase in IPO activity after a two-year lull.
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