By Umesh Padval
As we bid goodbye to a tumultuous 2023, marked by macroeconomic uncertainties and geopolitical tensions, the private markets stand at a crossroads in 2024.
Despite headwinds, the year concluded on a strong note, witnessing record highs in stock markets and a gradual easing of interest rates and market volatility. As a venture capitalist, I find myself contemplating the implications of these shifts on the private markets and predicting the year ahead.
The reckoning for private companies: Survival of the fittest
The early part of 2024 is poised to be a challenging period for private companies. A confluence of factors, including a global economic slowdown, higher interest rates and increased conservatism among venture capitalists, will test the resilience of startups.
The repercussions of oversupply for capital in 2023, driven by the influx of new venture funds in a low-interest-rate environment, are already evident with more than 3,200 venture-backed startups shutting down, as reported by Pitchbook.
Firms fueled by FOMO-driven investing contributed to inflated valuations, leading to a reckoning where many startups will either be shut down or sold as acqui-hires.
However, the best companies with strong founders and differentiated business models will have no problem attracting capital at premium valuations.
As public companies focus on improving operational efficiency through cost-cutting and downsizing, and private companies either close down or reduce their workforce, a large talent pool is emerging. Well-funded private enterprises stand to benefit from this scenario, as they will have access to a wealth of skilled professionals seeking new opportunities.
A renaissance for investment banks: Year of IPOs and M&A
After weathering a tough few years, investment banks are poised for a resurgence in 2024. The acceleration of mergers and acquisitions will be driven by private companies grappling with financial challenges. Large public companies, having streamlined their operations, accumulated substantial cash reserves, and witnessed market multiples expand, will target strategically aligned companies for acquisitions.
Secondly, the IPO market is expected to open in 2024, featuring stalwarts like Databricks and Stripe, alongside a pipeline of more than 400 companies with substantial revenue eager to access public markets.
Private equity firms, having been active investors in recent years, will seek exits through IPOs and further fortify their portfolios by acquiring startups.
Third, we expect more private tech companies to do secondary sales to provide liquidity to longtime employees and investors until the IPO market opens, similar to what Canva, SpaceX and CoreWeave have done.
Venture capital in flux: Balance of power shifts to LPs
The low-interest-rate environment and heightened LP allocation to the venture category have led to a proliferation of new venture funds.
However, the lack of exits and increase in company shutdowns will likely result in the demise of numerous venture funds. Venture capital jobs will become highly competitive, with only the best investors in demand.
As 2024 unfolds, we anticipate a transition in leadership within venture firms, with younger partners taking the reins as they raise new funds and adapt to the evolving landscape.
The continued impact of generative AI: The buzz will start to wear off
The emergence of generative AI, epitomized by the spectacular rise of ChatGPT in 2023, heralds a new era with profound implications for enterprises worldwide.
While 2023 witnessed significant funding for AI startups, 2024 is poised to shift the focus to enterprise applications from consumers. Enterprises will develop strategies to operationalize AI across their product lines. Valuations for AI companies are anticipated to undergo a correction to more normal levels as the initial FOMO-driven investing settles down.
As we navigate the intricate landscape of venture capital in 2024, the year promises to be intriguing, marked by challenges and opportunities alike. Startups will face a crucible, investment banks will experience a renaissance, venture capital will undergo transformation, and the impact of generative AI will continue to reverberate across industries.
It is indeed a year that demands strategic acumen and adaptability from all stakeholders in the dynamic world of venture capital.
Umesh Padval is a managing director at Thomvest Ventures focused on investments in the cybersecurity, cloud and AI infrastructure sectors partnering with founders and CEOs of companies developing disruptive platforms solving key pain points for CXOs. Padval currently serves as a board member at Isovalent, Bolster, Quiet AI, Impinj and Avalanche Technology, and as a board observer at Clari. He is also an investor in Cohere, Harness, Baffle, CyCognito and Opaque Systems.
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Illustration: Dom Guzman
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