VC Predictions 2024: What Investors Expect This Year

Venture Capital Trends for the New Year

The arrival of a new year often inspires optimism, though predictability remains elusive, particularly within the venture capital landscape. Recent data indicates a significant decrease in the total number of venture firms operating in the United States.

This contraction is largely attributed to a shift in investment strategy by institutional investors. They are now prioritizing larger, more established companies in Silicon Valley, demonstrating a heightened level of risk aversion.

Currently, Artificial Intelligence (AI) stands as the dominant investment focus, and this trend is expected to persist. However, the year is young, and the potential for evolving dynamics remains.

VC Predictions for the Coming Year

Insights were gathered from several venture capitalists to forecast the opportunities and challenges that lie ahead. Their perspectives cover anticipated positive developments, potential setbacks, and unforeseen occurrences.

The following represents a compilation of their predictions, which have been condensed and edited for improved readability and conciseness.

Key Takeaways: The venture capital environment is undergoing a period of consolidation, with investors increasingly favoring established AI companies. Despite this trend, the possibility of disruptive change remains a factor.

Venture Capital Predictions for 2025: Optimism and Caution

Nekeshia Woods, Managing Partner at Parkway Venture Capital

Positive Outlook: As high-net-worth individuals adjust to lower returns from traditional investments like bonds and cash, a greater allocation to private markets is anticipated. This trend is projected to result in over $7 trillion invested in private markets by 2033.

Wealth and asset management firms are increasingly utilizing venture capital as a key differentiator within their private market portfolios. These institutions aim to provide access to prime investment opportunities and capture a portion of the substantial capital influx expected in private markets.

Further Positives: Fund managers are poised to benefit from partnerships with these institutions, gaining access to a new base of Limited Partners (LPs) and establishing a stable, long-term capital flow for their funds.

The artificial intelligence sector is expected to undergo consolidation, largely through acquisitions, particularly in areas where AI technologies become standardized, such as large language models. Companies that will emerge as leaders will be those that pioneer new market segments and possess exclusive data assets.

Gabby Cazeau, Partner at Harlem Capital

Positive Forecast: A resurgence in the Initial Public Offering (IPO) market is expected, with several high-profile IPOs injecting much-needed liquidity into the system. This development would be advantageous for all stakeholders.

Investment activity at the early stages is also predicted to increase, potentially reaching levels comparable to 2021, and certainly exceeding those of 2022-2024. 2025 is anticipated to be a strong year for venture capital, potentially marking the beginning of a new bull market.

Challenges Ahead: 2025 will be a critical year for AI startups targeting enterprise clients. Many of these startups have experienced rapid growth but remain reliant on experimental budgets rather than being integrated into core software spending.

A significant number of these companies may struggle to transition, leading to potential failures as customer churn and sluggish growth become prevalent.

Triin Linamagi, Founding Partner at Sie Ventures

Positive Developments: The rise of solo General Partners (GPs) and angel funds will likely lead to increased investment in early-stage companies, addressing a critical need within the venture capital landscape.

We anticipate a greater emphasis on specialized investment strategies, with investors possessing deep industry knowledge providing substantial value to founders. This evolution will benefit both startups and investors, potentially yielding improved returns.

Continued growth in capital allocation to diverse founding teams is expected, particularly in sectors such as sustainability and healthcare, where varied perspectives can foster innovation and positive impact.

Potential Setbacks: Significant Mergers and Acquisitions (M&A) or IPO activity is unlikely to materialize until late 2025, as market conditions remain unfavorable. Limited Partners may remain cautious about deploying capital, awaiting improvements in distribution-to-paid-in capital ratios before committing to new funds.

Michael Basch, Founder and General Partner at Atento Capital

Favorable Trends: Increased liquidity for LPs is anticipated with the reopening of IPO and M&A markets. A rise in secondary transactions by both funds and companies is also expected.

A recalibration of expectations for previously profitable, but now struggling, companies will lead to more realistic valuations when sold to private equity firms. Consolidation and roll-ups are likely to occur in saturated markets, such as the GLP-1 pharmaceutical space.

Areas of Concern: Continued declines in the valuations of unicorn companies are expected, driven by market adjustments and revised growth projections.

Austin Clements, Managing Partner at Slauson & Co.

Positive Projections: The IPO market is expected to reopen following the successful IPO of Service Titan, and M&A activity for private companies will also increase. Realizing these gains will enhance liquidity for the LPs invested in venture capital firms.

This increased liquidity will likely result in LPs committing to a greater number of new funds than in recent years.

Potential Risks: LPs may exhibit greater reluctance to invest in new fund managers, having observed instances of imprudent investment practices during the previous market cycle. Consequently, some of the most innovative investment strategies may face challenges in securing funding.

Emerging Trends in Investment: Persistence and Decline

Woods

Enduring Trends: Favorable conditions for investors possessing available capital are anticipated to persist. A shift in focus is occurring, with investors increasingly prioritizing metrics like booked revenues, client pipelines, and cost structures over simple user numbers when evaluating potential investments. This investor-friendly environment, characterized by a measured investment pace, is expected to continue.

Declining Trends: The initial public offering (IPO) market demonstrates a cautiously optimistic outlook. Renewed founder confidence, coupled with diminishing cash reserves and valuation adjustments among surviving high-value companies, are contributing factors. Furthermore, increased investor interest in small-cap stocks is expected, alongside the strong performance of major technology companies. While some companies still require valuation recalibration, several, particularly within the technology sector, are poised for public offerings.

Cazeau

Enduring Trends: The success of small, highly efficient teams achieving substantial revenue growth – exceeding $2 million ARR with just one to three members – is a notable development. This is largely attributable to the effective utilization of artificial intelligence tools, enabling greater productivity. This level of growth, previously uncommon, underscores the increasing automation within startups.

Investment in reskilling initiatives will also likely increase. Platforms addressing skill gaps in sectors like skilled trades, manufacturing, hospitality, and healthcare – areas less susceptible to complete automation – are expected to attract funding.

Linamagi

Enduring Trends: The integration of artificial intelligence is firmly established and its influence will continue to expand. AI offers significant benefits, including improved decision-making, enhanced deal sourcing, and streamlined operations. However, the importance of human intuition and experience, especially in assessing founding teams, remains crucial. Limited Partners (LPs) will need to refine their manager selection and portfolio construction strategies accordingly.

Declining Trends: The practice of making numerous, less-scrutinized investments is expected to diminish. A shift towards fewer deals, characterized by more thorough due diligence and active investor involvement, is anticipated. This signifies a departure from the previous emphasis on rapid growth at any cost, with investors now prioritizing profitability and sustainable business models.

Basch

Enduring Trends: Companies perceived as leaders in the artificial intelligence landscape will likely continue to attract substantial investor interest and command high valuations. The trend of venture-backed companies ceasing operations due to stricter capital market conditions is also expected to persist. Additionally, challenges in fundraising for seed-stage venture capital firms, stemming from underperforming funds established in 2020 or 2021, are likely to continue.

Clements

Declining Trends: A recent trend saw increased investment in enterprise SaaS and reduced investment in consumer applications. This dynamic is predicted to reverse as advancements in artificial intelligence unlock new possibilities for consumer-facing technologies, leading to a resurgence in consumer tech investment in 2025.

Potential Disruptions in Venture Capital and Startups: A 2025 Outlook

Cazeau

The coming year could witness the merging of prominent unicorn companies, or even their outright closure. Many of these once-celebrated businesses possess sufficient capital to reach 2025, but lack the necessary expansion to sustain themselves beyond that point.

Current trends indicate a period of consolidation, and this is anticipated to gain momentum throughout 2025.

Linamagi

A substantial disruption, stemming from a climate catastrophe, geopolitical instability, or a major economic downturn, carries the potential to drastically alter the dynamics of the startup and venture capital sectors.

Basch

An influx of venture capital investment is expected to focus on hard technology, driven by the increasing commoditization of software due to advancements in generative AI.

This shift will see areas like biotechnology, advanced materials, and hardware gain prominence. Furthermore, we may observe a notable rise in companies securing only a seed round of funding and achieving exits under $100 million within three years.

This represents a new financial model that could prove beneficial for both founders and venture capitalists, particularly for companies leveraging rapid distribution to acquire complementary products.

Clements

A surprising development could involve OpenAI transitioning to a for-profit structure specifically to facilitate its acquisition by Microsoft. This would potentially represent the largest acquisition in history.