Venture Deal Flow: Record Numbers Of Companies Seek Financing In Bifurcated Market

By Don Butler

This year has turned out to be quite positive for venture funds that have dry powder left after pacing themselves during the venture bubble of 2020-2021.

We’ve seen a dramatic increase in 2023 in the number of early-stage startups seeking financing as well as a large set of mid- to late-stage companies coming back to raise subsequent rounds.

The spike in demand for capital among startups has presented a deal-flow challenge for many venture funds this year — our firm is running at more than twice our normal volume of quarterly prospects.

At the same time, the market has bifurcated into two very different types of deal dynamics based on company stage and market sector.

Deal dynamics

Generative AI technologies led to a boom in new companies and investment opportunities for many. In Q2 and Q3 of this year, we evaluated more companies seeking financing than ever before in our history. The only other time we saw deal volumes approach this level of sought-after financing was in Q1 2021, when the COVID-induced bubble was underway.

While volumes were up significantly, the deal sources for our firm remained relatively consistent: Around one-third of the companies in the past two quarters of 2023 were introduced via seed funds and other venture firms we have worked with. We also saw consistency in companies coming to us from entrepreneurs we worked with in the past, and through our own thematically driven research process.

Today, the qualitative aspects of deals we are seeing in the middle and later stages feels very different from what we are seeing at the earlier stages.

Late-stage reset

In contrast to the optimism surrounding new AI-driven companies at the seed and Series A levels, most later-stage companies are navigating a post-bubble investment round dynamic.

Those later-stage companies raised large amounts of capital at valuations based on top-quartile revenue growth plans, during a time of top-quartile valuation multiples. If they met their growth targets while keeping burn in check, this subset of highly sought-after companies are likely seeing preemptive offers or are simply raising internal financing to carry forward. The majority of later-stage companies, however, are in a post-bubble reset mode where they have to demonstrate a combination of capital efficiency, growth and a willingness to reset valuation expectations in order to make a financing round come together.

Looking ahead, we can expect a reversion to more typical early-stage deal flow volumes as the current wave of AI-focused startups creates an increasingly crowded field. The narrative next year will shift to a focus on the product and market traction of those companies.

For many mid- to late-stage companies, we expect to see a continued reckoning in 2024 as they find their cash balances dropping and are forced into either a financing, sale or wind-down of the business. At the same time, 2024 may also become known for stories of entrepreneurial success as the best later-stage companies look to go public or are acquired by incumbents in recognition of the very successful businesses they have built.

 Don Butler is a managing director at Thomvest Ventures, a $500 million evergreen VC fund founded by Peter Thomson (Thomson Reuters). His investments are focused on financial technology and marketing technology companies that leverage emerging and persistent data sources to better acquire and serve customers.

Illustration: Dom Guzman