As we close out 2024, the Venture Capital “VC” landscape is ripe for transformation. In this blog, I’ll discuss four trends to watch out for in the new year: VC activity, impact and sustainability, democratization in venture, and the industry of the year—AI.
While we saw the startup and VC landscape hit a record-breaking year in 2021, where, according to Pitchbook, VC-backed companies raised $329.9B (almost double from $166.6B in 2020), in 2022 we saw the bubble burst. As KPMG notes, total deal value dropped from $212.0B in Q4 of 2021 to $95.1B in Q4 of 2022. The trend continued through 2023 and most of 2024 as the door remained shut for IPOs and acquisitions, freezing the entire venture pipeline.
The Federal Reserve has already cut interest rates two times this year and is projected to continue lowering rates into 2025. Generally, lower interest rates bring more investment into high-risk opportunities like VC as opposed to fixed-income assets such as bonds. This means we have the potential to see a better startup environment going into the new year.
As a bellwether for where things may be heading, Groove’s internal angel activity has seen total dollars invested up 33% in 2024 from the previous year, not including Q4 of this year. Though faint, the early stage activity appears to be picking up in anticipation of a more active investing climate.
Investors are becoming more diverse across gender and age, reshaping the balance between seeking returns and funding impact.
According to the Center for Venture Research, the number of women angel investors has spiked from 33.6% in 2021 to 46.7% in 2023. When it comes to what women prioritize when investing, Forbes explains that different factors such as the gender of the founders whom they are investing in and social impact are of importance.
This sentiment is also reflected when looking at younger investors, with Riverwater Partners noting that nearly two-thirds of millennial investors want to allocate their portfolios in a way that supports causes they care about. Moreover, CNBC finds that 85% of Gen Zers are willing to accept a lower return than the S&P’s 12% average if it means investing in ways that match their values. When asked the same question, only 65% of boomers answered similarly.
Forbes states that only 4% of startups received funding from Venture Capitalists in 2022. Vehicles such as crowdfunding campaigns and SPVs provide easier and lower-barrier investing methods, helping democratize the funding landscape. When considering the growth of these vehicles, Carta notes that SPVs are up 116% compared to five years ago and CleanStart notes crowdfunding is up 33.7% in just the last year. Within Groove’s internal data, we’ve also noted the impact of these newer investor-friendly tools, finding that investments running through an SPV receive on average 5.6 additional checks than a direct investment.
One explanation could be that alternative investment vehicles allow accredited and non-accredited investors to invest at a lower dollar amount. Consider the growth of younger investors, as we discussed earlier. While these investors might have a lower net worth, they are eager to start building their portfolio and invest in causes they care about.
With AI companies receiving almost 1 out of every 3 VC dollars in 2024, according to CB insights, the buzz around the vertical is at its feverpitch. VC’s are not only putting their money into AI, they are using it to make their investment decisions. In fact, Gartner predicts that over 75% of all VC and early-stage decisions will be informed using AI and data analytics by 2025.
AI deals are seeing potential overvaluation in the market. To paint this picture, Pitchbook states that global early-stage median pre-money valuations for the AI vertical in Q1’ of 2024 were at $70.63M compared to Fintech at $50M and SaaS at $46M. Overvaluation creates potential barriers in raising other rounds due to investor hesitancy, in hiring with potential lower equity payouts, and in poor decision-making with unrealistic benchmarks to meet. With winners and losers likely starting to take shape in 2025, it will be interesting to see how the excitement within the sector plays out and how overvaluation will affect future fundraising. Has the bubble burst? Not yet, but pointy-shapped objects in the mirror are closer than they appear.
As we head into 2025, market dynamics, industry trends, and growing new investor groups will continue to influence the startup ecosystem. The rise of women and young angel investors is projected to further accelerate Environmental, Social, and Governance (ESG) investing. As the investment landscape becomes increasingly democratized, it will open the door to greater funding for alternative assets. Meanwhile, ongoing investment in AI, along with the possibility of lower interest rates, will continue to fuel startup investments and influence the market’s growth trajectory.
As these trends continue to shape the VC and startup landscape, it's crucial for investors and founders to stay ahead of the curve in order to adapt to and capture these emerging opportunities.