As we begin this new year, the data is rolling in on how startups fared in 2024, where venture capital dollars flowed, and much more. I’m a big fan of annual startup and funding reports, so I’ve been reading through all the recent reports from Carta, PitchBook, CB Insights, Crunchbase — you name it.
It’s clear 2024 was a pivotal year for startups and VC firms. Venture capital, in general, underwent a major evolution over the last four years, and we are now just starting to see early signs of what this new vintage of VC and startups will look like. Looking back at last year’s data, I ultimately came to three conclusions.
1) We’re back to pre-COVID funding levels, but early-stage funding still lags.
We know that 2020 and 2021 were outliers in terms of startup investment and funding, but, up until 2024, we were still fighting to get back to 2019 funding levels and activity.
The funding rounds in the Zero Interest Rate Policy (ZIRP) era — both activity and valuations — ballooned to record highs. As the free-money machine dried up, though, we saw funding figures rapidly decline.
We saw unprecedented shutdowns, incredibly difficult fundraising environments, and more and more companies turning down VC dollars to stay private for longer or shift to profitability entirely.
In 2024, though, startup funding was back on track, albeit modestly, to over $209 billion, according to PitchBook. Much of that investment, though, was geared toward growth- and late-stage startups, while early-stage funding fell 12-14+% year-over-year, per Carta’s research.
Slowly but surely, we’re seeing VC firms willing to open the coffers, but not for every kind or stage of startup. I expect this willingness to place more bets on early-stage tech startups to rise as 2025 progresses, but, as the next trend shows, primarily for AI startups.
2) The delta between AI startups and non-AI startups is widening.
One of the biggest trends we saw in 2024 was the explosion around AI. It propelled much of the public market gains, but also was the backdrop to much of the private startup activity as well in 2024.
While funding increased from 2023-24, we are starting to see a tale of two cities in early-stage startups: AI companies vs. non-AI companies. As CB Insights wrote, AI is eating VC. According to their data:
- Startups offering AI tech represented 37% of venture funding and 17% of deals, both all-time highs.
- The major AI infrastructure players raised the top-5 venture deals of the year, with four closing in Q424 alone, driving a 2-year high in quarterly funding.
- With nearly three in four (74%) AI deals being early-stage in 2024, investors are staking out early claims to reap the rewards of the tech’s potential.
That makes it essential for startup founders and leaders who want to stand out to VCs and grab their attention to a) ensure their AI platforms differentiate from the numerous GPT-wrapped solutions on the market and b) tell a compelling story that relays their unique value proposition compared to other AI tools.
3) Despite having dry powder, many venture funds are underperforming.
In 2024, startup failure reached never-before-seen levels, as 277 startups closed their doors for good. That marked an increase of 29% from 2023. Of those 277 startups, 109 of the companies had raised at least $20 million.
The ZIRP climate also led to an investment peak for venture capital firms themselves in 2021, with LPs pouring money into VC and private equity as a whole like never before.
We saw deployment rates skyrocket and firms raising new funds within 12-24 months at times. The pullback was dramatic, though, as many funds slowed investments, while sitting on historic highs in dry powder.
As you can see, Carta data showed that 2022 vintage funds have only deployed 43% of capital after 24 months, down from 51% in the 2021 vintage and 60% in the 2020 vintage.
We are still years out from seeing the performance data, but early signs are showing that IRR, DPI, and TVPI are all also lagging behind 2017-21 vintages.
This is due in large part to the lack of returns, IPOs, and exit liquidity we’re seeing across the market. We have felt this, but Carta’s data reinforces the dramatic impact this had.
According to PitchBook data, “2024 recorded an estimated total of 1,259 exit events with an aggregate value of $149.2 billion. The exit count in 2024 eclipsed that of the prior year by 10%, while total exit value reflected a 24.3% YoY uptick.”
That still only barely topped the exit liquidity we saw in 2017 ($143.8 billion) and is down 82% from the 2021 high of $841.5 billion. All in all, 2024 saw a handful of major headlines around VC firm shutdowns, pivots, and more. I think we are still just in the early stages of a major evolution of what the venture ecosystem will look like in the future.
This environment is causing lots of investors to rethink their fund strategies, investment criteria, and more.
I think the best firms of this vintage are going to be the ones that find a way to reinvent themselves. The ZIRP phenomenon of 2020-21 accelerated a fundamental change in the venture ecosystem.
