A significant shift is happening in the world of venture capital (VC), with predictions suggesting that 65% of VCs will go out of business within the next few years. This change has crucial implications for startup founders awaiting Series A, B, or C funding.
For years, the startup world has held the perception that VCs sit at the top of the financial hierarchy. However, the reality is different—venture capitalists are not invincible. Like any other business, they are subject to the same market pressures. VCs raise capital from their investors, known as limited partners (LPs), and their core responsibility is to deliver returns for those LPs.
In the 2010s, VC firms were riding a wave of success. With outstanding returns, many new funds emerged, and existing ones expanded significantly. By 2021, 1,577 VC firms had collectively raised a staggering $183 billion. However, while the funds grew larger, the costs to launch a startup became smaller. Tools became more accessible, a global workforce offered affordable talent, and distribution channels flourished online, making it easier and cheaper than ever to build a software-as-a-service (SaaS) company.
This has created a fundamental problem for VCs: there is simply too much capital chasing too few deals. And for venture capital firms, this imbalance is a recipe for disaster.
The window for initial public offerings (IPOs) has closed, meaning that companies are no longer going public as easily. Consequently, VCs aren’t seeing the lucrative returns they once did from IPOs. Similarly, mergers and acquisitions (M&A) have slowed down, and when they do occur, the prices are not always favourable for sellers. As a result, VCs are not making significant profits by selling off their portfolio companies either.
If venture capital firms aren’t making money, they can’t return capital to their LPs—and that puts them in a precarious position. Although VCs don’t go out of business as visibly as startups do, the signs are clear for those who pay attention. Reputations are on the line, so change happens quietly. However, the outcome is the same: more firms are shutting down or scaling back.
Increasingly, VCs are saying, “We have decided not to raise another fund.” In reality, it’s likely they can’t. Other firms are shifting focus, announcing that they are “no longer investing,” while some partners are leaving to take up operational roles in other companies. Managing directors are retiring. The data backs up the trend: in 2023, only 597 VC firms raised $81 billion, a decline of 63% in the number of firms and 56% in capital raised compared to 2021.
The VC party is over, or at least this chapter of it is. A select few top firms will still have access to the best deals, and the true business builders will choose their investments wisely, continuing to thrive in this changed environment. Many of today’s venture capital firms, however, won’t survive the next few years.
For startup founders and CEOs, the message is clear: the game has changed. Gone are the days when a founder could raise $30 million on the strength of a compelling pitch deck and a modest $200k annual recurring revenue (ARR). The era of VCs bailing out bad businesses with large cheques is over, and many of today’s VCs won’t even be around in the near future.
In this challenging economy, only one strategy will ensure survival: focus. Startups must double down on identifying their ideal customer profile (ICP), delighting their customers, and driving toward profitability to control their financial destiny. The best time to raise capital is when it’s not needed. In the current market, survival requires becoming lean, focused, and profitable.
It’s a harsh economy, and the winter is coming for many. The advice for startup leaders is to dig in, streamline operations, and prepare to weather the storm. The market is tough, but tough markets create strong companies.
The VC landscape may be shifting, but for those who can adapt, opportunities still abound.
