VCs Struggle to Refill Their Funds, Causing a Persisting Squeeze in Startup Fundraising

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Many startups are eagerly anticipating the potential opening of an IPO window and the likelihood of interest rate cuts later in the year, hoping this will lead venture capitalists to be more lenient with their funding. However, the fundraising environment for startups may not see significant improvements in the near future due to the challenges venture capitalists are facing in raising capital themselves.

In the first quarter of the year, U.S. VC funds only raised $9.3 billion, marking a downward trend that may result in a total of just above $37 billion by the end of the year. This would be the lowest capital raised since 2013, showing a significant 54% decline from the previous year.

Just as startups are finding it difficult to secure funding, VCs are also struggling to attract new capital from their backers, known as limited partners. The decrease in IPO and M&A activities in recent years has led to minimal cash distributions, impacting LPs’ willingness to invest further in venture funds.

It is anticipated that established VC firms will still be able to raise funds, albeit potentially with less capital to allocate to startups compared to previous years. However, newer and smaller venture firms may find it challenging to attract new capital from LPs.

On a more positive note, there is still a considerable amount of dry powder available for VCs to invest from previous funds. Nonetheless, this pool of capital will gradually diminish without new investments from LPs.

While the current fundraising challenges may not significantly impact the future of VC, continued difficulties in raising capital could hinder deal-making in the sector. This indicates that both startups and VCs will need to navigate these challenges in the coming years.

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