The outlook for venture capital investments in the United States by 2025 appears relatively better than what the market has produced in recent years, according to a report from Proposal book.
In its year-end venture capital report, Pitchbook said exits (startups being bought out or going public) are expected to increase, and a moderate rebound in the number of big tech companies hitting the public markets should be a big boost to the output value.
And that will stimulate reinvestment. Pitchbook said this trend will increase distributions and provide limited partners with the liquidity they need to reinvest in the strategy or balance their overall portfolio.
“We’ve said for a long time that dry powder would continue to stabilize the deal, and that was largely the case in the initial deals and early stages,” Pitchbook said. “Not all of those deals were win-win (some were mixed with dilutive structures or raised at significantly lower valuations), but deals were being done. Market conditions should favor private equity in some areas, but the bar for improvement is low.”
The Federal Reserve’s rate cut in September started the path forward. Assuming inflation stays low and keeps pace with further cuts, then markets should react accordingly and there will be more risk appetite in public markets, attracting tech companies with the idea that now is better than ever. Uncertainty remains in the market and potential increases in macroeconomic volatility events may continue to occur.
With a re-elected Trump administration, proposed tariffs on goods imported from countries such as China and Mexico could irritate markets. The administration’s handling of the wars in Ukraine and the Middle East, not to mention elevated tensions between the United States and China, are also poised to induce market moves.
The US economy is relatively well set up heading into 2025. Inflation has been on track to move towards the Federal Reserve’s target level, public markets have seen significant gains over the past year, GDP growth is around 2, 5% and stable, and unemployment is reasonable. Business results have also been presented solidly in the market. In general, economic indicators are bifurcated from consumer confidence, which has been low and has yet to recover from pre-COVID-19 highs.
However, Venture has marched to its own beat. AI has fueled interest on Wall Street and has resoundingly attracted the most venture capital dollars. Late-stage and venture growth deals have been delayed in recent years due to a lack of crossover investor capital flowing into venture capital. Those institutions felt the pain of lack of liquidity, but there are many opportunities to invest in companies awaiting their IPO, and an increase in share prices should also loosen the grip on that capital. The last few years of suffering for venture capital have probably helped empty the system of tourists for the time being, as well as investors who were in venture capital because it was the right thing to do.
As a team, Pitchbook said its outlook on US venture capital is moderately positive through 2025. That doesn’t mean the challenges have gone away. The flat and bearish rounds are likely to continue at a higher pace than the market is accustomed to. More companies are likely to close or exit the venture funding cycle.
However, both expectations are holdovers from 2021.
“We don’t expect the IPO count to end the year anywhere near the roughly 200 (not including SPACs) that occurred in 2021, but 40% of US unicorns have been held in portfolios for at least nine years, and that group represents more than 1 billion dollars in value. That is a figure that can quickly raise exit values and restart the VC machine,” Pitchbook said.
Pitchbook’s rationale noted that from 2016 to 2020, the average capital supply and demand ratio for the venture market was about 1.2 times for late-stage companies and 1.4 times for ventures.
companies in growth stage. This indicates that startups consistently needed more capital than investors provided. The venture capital demand-supply ratio measures the balance between the capital deployed by venture capital firms and other market participants (capital supply) and the number of startups seeking to raise capital (capital demand).
A ratio of 1x represents a balanced market where supply equals demand. However, for late-stage growth and venture companies, estimated demand has generally exceeded supply, driven by their proximity to public markets. By 2023, the demand-supply ratio peaked at 3.5 times for these companies, a significant imbalance where only $1 million was available for every $3.5 million demanded by startups, for example.
This ratio captures the cyclical nature of the risk market. During the 2020-2021 boom, near-zero interest rates and an influx of non-traditional investors created unprecedented capital availability, driving the ratio to a low of 0.6x for growth-stage companies late and risky for the fourth quarter of 2021. As macroeconomic conditions changed, rising interest rates and inflation caused a retreat by non-traditional investors, quickly reversing the trend.
By 2023, the demand-supply ratio peaked at 3.5 times, reflecting lower capital availability and greater investor selectivity. This environment has especially hit more mature startups, many of which raised large rounds during the 2020-2021 boom and now face challenges raising new funding at comparable valuations. A frozen exit environment has exacerbated these challenges, keeping many companies private. While some stronger startups managed to raise capital, others faced increasing financial pressure. Outlook: The supply-demand imbalance for late-stage and risk-growth companies will remain above 2016-2020 trend averages.
As conditions improve, and with the expectation of a relatively stronger outbound market, we expect supply and demand ratios in 2025 to reach or continue trending above the 2016-2020 averages of 1.2. times for late-stage companies and 1.4 times for risky ones. companies in growth stage. Using current deal inventory, Pitchbook projects using 2016-2020 historical averages that observed deal value per month would need to reach approximately $15 billion for late-stage companies and $7 billion for venture growth-stage companies.
While an expected rebound in exit activity next year could revive the venture flywheel, the buildup of private companies and current capital constraints suggest the recovery is likely to be gradual. Pitchbook estimates that there are currently more than 18,000 late-stage and venture growth companies in the inventory, representing 32.4% of venture capital-backed companies, of which at least 1,000 venture capital-backed companies They haven’t raised another round of venture capital since 2021, said Pitchbook analyst Kyle Stanford.
A key risk lies in any significant change that could bring market supply and demand closer to parity, moving the relationship away from the expected imbalance. A rapid reopening of the exit market, driven by a surge in IPOs or M&A activity, could release backlog demand at later stages, increasing distributions to LPs. Additionally, as non-traditional investors divest part of their portfolio and later-stage companies look to restructure in preparation for exit opportunities, there is great potential for greater participation by non-traditional investors in companies.
Historically, private equity funds that deployed capital during recovery phases have generated higher returns, further incentivizing re-entry into risk. Additionally, periods of high liquidity are typically associated with faster implementation cycles. If non-traditional investors re-enter the market and traditional venture investors significantly increase implementation speeds, the expected imbalance above demand of 1.2x and 1.4x
The bid ratio for late-stage and growth-risk companies, respectively, may not materialize.
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