The outlook for US venture capital investment through 2025 looks relatively stronger than the market has produced over the past few years. Pitchbook.

In its year-end VC report, Pitchbook says exits (startups being acquired or taken public) are expected to increase, and a moderate increase in the number of large tech companies going public should provide a big boost to valuations.

And that will encourage reinvestment. Pitchbook says this trend will increase distributions and provide limited partners with the liquidity they need to reinvest in the strategy or rebalance their overall portfolio.

"We've been saying for a long time that dry powder will continue to stabilize deals, and that's mostly been the case in seed and early-stage deals," Pitchbook said. “Not all of these deals were wins, some were mixed with dilutive structures or raised at significantly lower valuations, but the deals got done. Market conditions should help VCs in some areas, but the bar for improvement is low.”

The Federal Reserve's (FRS) rate cut in September started the way forward. Assuming inflation remains low and further cuts are on pace, markets should react accordingly and more risk appetite will enter the public markets, enticing tech companies with the idea that now is never better. Uncertainty remains in the market and the potential increase in macroeconomic instability events may continue.

With the re-elected Trump administration, proposed tariffs on imports from countries such as China and Mexico could rattle markets. The administration's approach to the wars in Ukraine and the Middle East, not to mention US-China tensions, will drive market movements.

The US economy is relatively well positioned for 2025. Inflation has been on track to move toward the Fed's target level, public markets have made significant gains over the past year, GDP growth is around 2.5% and stable, and unemployment is reasonable. Corporate earnings also showed strongly in the market. In general, economic indicators are divided by consumer confidence, which has been low and still hasn't recovered from pre-COVID-19 highs.

The venture ran at its own pace. AI has piqued the interest of Wall Street and attracted the most VC dollars. Late-stage and venture-backed growth deals have lagged in the past few years due to a lack of investor capital flowing into VCs. These institutions have felt liquidity drying up, but there are plenty of opportunities to invest in companies awaiting IPOs, and increased listings should also free up that capital. The last few years of doom for VC probably helped purge the system of tourists as well as investors who got into VC because it was the "it" thing.

As a team, Pitchbook said its outlook for U.S. venture capital is slightly more positive through 2025. This does not mean that the difficulties are behind us. Flat and down rounds will likely continue at a higher pace than the market is used to. More companies may close or exit the venture capital cycle.

However, both of these expectations were not fulfilled until 2021.

“We don't expect the number of IPOs to end the year at around 200 (excluding SPACs) in 2021, but 40% of US unicorns have been held in their portfolios for at least nine years, and this group is much longer. The price is 1 trillion dollars. It's a metric that can rapidly increase exit rates and rev up the VC machine,” Pitchbook said.

Pitchbook's reasoning noted that from 2016 to 2020, the average capital demand ratio for the venture capital market reached approximately 1.2 times for late-stage companies and 1.4 times for venture capital companies.
growth stage companies. This shows that startups always require more capital than is provided by investors. The venture capital supply-demand ratio measures the balance between capital deployed by VC firms and other market participants (capital supply) and the amount of startups willing to raise capital (capital demand).

A ratio of 1x represents a balanced market where supply and demand are equal. However, for late-stage and venture-backed growth-stage companies, estimated demand typically exceeds supply, due to their proximity to public markets. By 2023, the supply-demand ratio has reached 3.5 times for these companies, a significant imbalance, with only $1 million available for every $3.5 million required by startups, for example.

This ratio reflects the cyclical nature of the venture capital market. During the 2020-2021 boom, near-zero interest rates and an influx of non-traditional investors created unprecedented capital availability, reducing the ratio to 0.6x by Q4 2021. As macroeconomic conditions change, interest rates and inflation lead to a pullback, non-traditional investors quickly reverse the trend.

By 2023, the supply-demand ratio has peaked at 3.5 times, reflecting the diminishing capital and investor selectivity. This environment has particularly affected mature startups, many of which raised large rounds during the 2020-2021 boom and are now having difficulty securing new funding at relative valuations. A frozen exit environment has compounded these challenges, leaving many companies in limbo. While some strong startups have managed to raise capital, others have faced increasing financial pressure. Forecast: The supply-demand imbalance for late-stage and venture-backed growth-stage companies will remain above the average trend for 2016-2020.

As conditions improve and in anticipation of a relatively stronger exit market, we expect the supply-demand ratio to meet or trend toward the 2016-2020 average by 2025, with 1.2x for late-stage companies and 1.2x for venture capital companies. increases by 1.4 times. growth stage companies. Using current deal inventory, Pitchbook projects historical averages for 2016-2020 should reach approximately $15 billion in observed deal value per month for late-stage companies and $7 billion for venture-backed growth-stage companies.

An expected pick-up in exit activity next year could restart the venture flywheel, but the backlog of private companies and capital constraints suggest the recovery will be slow. Pitchbook estimates that there are currently more than 18,000 late-stage and venture-backed growth companies in inventory, representing 32.4% of VC-backed companies, of which at least 1,000 VC-backed companies have not raised another VC round since 2021. Kyle Stanford, Pitchbook Analyst.

The main risk lies in any significant changes that could bring market supply and demand closer to parity, moving the ratio away from the expected imbalance. A rapid opening of the exit market, driven by increased IPO or M&A activity, may release a backlog of later-stage demand and increase redistribution to LPs. In addition, there is strong potential for more non-traditional investors to venture into venture capital as non-traditional investors offload a portion of their portfolios and later-stage companies look to restructure in preparation for exit opportunities.

Historically, VC funds that have deployed capital during recovery phases have generated strong returns and spurred re-entry into the venture. In addition, periods of high liquidity are often associated with faster deployment cycles. If non-traditional investors re-enter the market and traditional venture capital investors significantly increase the speed of deployment, the expected imbalance will be between 1.2x and 1.4x demand.
the provisioning ratio for late-stage and venture-growth stage companies, respectively, may fail.