Is normal the new normal?

Hallmarked as a downturn in venture funding, the past two years could signal a reversion to the mean, ushering in new opportunities shaped by growth discipline and investment selectiveness.

💵 Funding: 2023 has seen a significant drop in startup funding. In Fintech, the number of deals fell from over 6,000 in 2021 to less than 4,000 in 2023. Many startups have relied on insider or down rounds to stay afloat. This has allowed VC funds to maintain their marks but the relief is temporary. The current lack of liquidity affects how much capital can be invested into new VC funds, making the funding volumes and valuations of 2019-2021 unlikely to return any time soon.

🏋️ Discipline: with the Fed signaling no rate hikes, inflation might stabilize at current levels, which historically isn't unusual. This environment will carry a heightened focus on cost containment and disciplined unit economics. Cutting burn rates allows startups to preserve cash (57% of venture-backed startups have fewer than 18 months of runway left), but retaining customers and revenue streams is the most important test to pass. It requires a reconfiguration of the business, often uncharted for current teams and investors.

🛬 Exits: recent IPOs have not performed as anticipated, making exit options less certain. In 2024, there might be pent-up appetite from strategic acquirers to drive inorganic growth and the integration of new technologies through M&A, but only at recalibrated valuations and if the target startups are groomed for integration (a perennial M&A challenge). To execute this transition, new operations-focused investment models are emerging between venture capital and private equity.

In short: the current normalization will lead to significant adjustments and potential failures but also open up new opportunities. As 2024 could see a rebound in alternative investments, the focus is likely to shift towards achieving more consistent risk-adjusted returns. Venture buyouts could emerge as a valuable category combining value investing and disciplined operations at the intersection of venture capital and private equity. This could be the new normal.