The outlook for US venture capital investments for 2025 appears relatively stronger than what the market has produced in the past few years, according to a report by Promotion book.
In its year-end VC report, Pitchbook said exits (startups being acquired or going public) are expected to increase, and a moderate rise in the number of large tech companies hitting public markets should be a big boost to exit value.
This would stimulate reinvestment. This trend will then increase distributions and provide limited partners with the liquidity they need to reinvest in the strategy or balance their overall portfolio, Pitchbook said.
“We’ve long said that dry powder will continue to stabilize dealmaking, and that has largely happened in seed and early-stage deals,” Pitchbuk said. “Not all of those deals were a win-win – some were mixed with diluted structures or raised at much lower valuations – but there were deals getting done. Market conditions should favor venture capital in some areas, but the level of improvement is low.
The Federal Reserve’s (Fed) interest rate cut in September has started the way forward. Assuming inflation remains low and keeps pace with further cuts, markets should react accordingly, and there will be greater risk appetite entering public markets, tempting technology companies with the idea that now is better than never. There remains uncertainty in the market, and potential increases in macroeconomic volatility events may continue to occur.
With the Trump administration re-elected, proposed tariffs on imported goods from countries such as China and Mexico could anger markets. It is also expected that the US administration’s handling of the wars in Ukraine and the Middle East, not to mention the growing tensions between the United States and China, will stimulate market movement.
The US economy is set up relatively well heading into 2025. Inflation has been on track to advance toward the Fed’s target level, public markets have seen significant gains over the past year, GDP growth is around 2.5% and steady, and unemployment is reasonable. Corporate profits also appeared strongly in the market. Overall, economic indicators are broken down by consumer confidence, which has been low and has yet to recover from its pre-Covid-19 highs.
However, the project moved at its own pace. AI has surprisingly increased interest on Wall Street and attracted the most venture capital dollars. Late-stage deals and venture growth have lagged in the past few years due to a lack of cross-flow to VCs. These institutions have felt the pinch of liquidity drying up, but there are many opportunities to invest in companies awaiting IPOs, and an increase in listings will loosen the grip on this capital. The past few years of struggling venture capital firms have probably helped drive out the tourist system for the time being, as well as investors who were interested in venture capital because it was the thing to do.
As a team, Pitchbook said its outlook for U.S. venture capital is fairly positive for 2025. That doesn’t mean the challenges are over. Flat and bearish rides are likely to continue at higher speeds than the market is accustomed to. More companies are likely to close or exit the venture funding cycle.
However, both of these predictions remain from 2021.
“We don’t expect the numbers of IPOs to end the year anywhere near the nearly 200 (not including SPACs) that occurred in 2021, but 40% of US unicorns have been held in portfolios for nine years over At the very least, this group represents more than $1 trillion in value. “This number could quickly push exit values up and reboot the venture capital machine,” Pitchbook said.
Pitchbook’s rationale noted that, from 2016 through 2020, the average capital supply-ask ratio for the venture market was about 1.2 times for late-stage companies and 1.4 times for venture capital companies.
Companies in the growth stage. This suggests that the capital needed by startups has always been greater than what investors provide. The venture capital supply and demand ratio measures the balance between capital deployed by venture capital firms and other market participants (capital supply) and the amount startups are seeking to raise capital (capital demand).
A ratio of 1x represents a balanced market where supply equals demand. However, for companies in the late stage of venture growth, estimated demand typically exceeds supply, driven by proximity to public markets. By 2023, the supply-demand ratio had peaked at 3.5 times these companies, a significant imbalance since there was only $1 million available for every $3.5 million requested by startups, for example.
This ratio reflects the cyclical nature of the project market. During the 2020-2021 boom, near-zero interest rates and an influx of non-traditional investors led to unprecedented capital availability, pushing the ratio to a low of 0.6x for late-stage companies and venture growth by Q4 2021. As macroeconomic conditions change Rising interest rates and inflation deterred non-traditional investors, causing the trend to quickly reverse.
By 2023, the demand-to-supply ratio had risen to a peak of 3.5 times, reflecting dwindling capital availability and increasing investor selectivity. This environment has particularly impacted more mature startups, many of which raised large rounds during the 2020-2021 boom and now face challenges securing new funding at comparable valuations. The frozen exit environment has exacerbated these challenges, keeping many companies private. While some of the strongest startups were able to raise capital, others faced increasing financial pressure. Outlook: The supply-demand imbalance for late-stage and venture growth-stage companies will remain above the 2016-2020 trend averages.
As conditions improve, and with the expectation of a relatively stronger exit market, we expect the 2025 bid-ask ratios to meet or continue to trend above the 2016-2020 averages of 1.2x for late-stage companies and 1.4x for venture firms. Companies in the growth stage. Using the current inventory of deals, Pitchbook expects with historical averages for 2016-2020 that monthly observed deal value would need to reach approximately $15 billion for late-stage companies and $7 billion for venture-stage companies.
While an expected rise in exit activity next year could restart the investment flywheel, the accumulation of private companies and ongoing capital constraints suggest that the recovery is likely to be gradual. Pitchbook estimates that there are currently over 18,000 late-stage and growth venture capital companies in stock, representing 32.4% of VC-backed companies – of which at least 1,000 VC-backed companies have not raised another round of venture capital Since 2021, he said. Kyle Stanford, Pitchbook Analyst.
The main risk is that any major changes may bring market supply and demand closer to parity, shifting the ratio away from the expected imbalance. A rapid reopening of the exit market, driven by increased IPOs or M&A activity, could release backlogged demand down the road, increasing distributions back to limited partners. In addition, with non-traditional investors offloading a portion of their portfolio, and with companies later looking to restructure in preparation for exit opportunities, there is strong potential for increased involvement of non-traditional investors in the venture.
Historically, venture capital funds that deployed capital during recovery phases have delivered stronger returns, further stimulating a return to adventure. Furthermore, periods of high liquidity are often associated with faster deployment cycles. If non-traditional investors return to the market and traditional investors significantly increase deployment speeds, the expected disruption above demand is 1.2x and -1.4x.
The supply ratio may not be achieved for companies in the late growth stage and companies in the investment growth stage, respectively.
https://venturebeat.com/wp-content/uploads/2024/12/2025-US-Venture-Capital-Outlook_1200x630-social-1.jpg?w=1024?w=1200&strip=all
Source link