Silicon Valley’s venture-capital (VC) firms are flush with promising startups to back, but they’re struggling to turn investments into profits. A historic slump in acquisitions and IPOs has left investors with fewer options to cash out.
In 2023, U.S. VC firms returned just $26 billion in shares to their investors—the lowest figure since 2011, according to PitchBook. The trend has continued in 2024, with record-high investments being offset by a lack of exits via mergers, acquisitions, or public offerings.
“We’ve raised a lot of money and given very little back,” said Thomas Laffont, co-founder of Coatue Management, at a recent conference. “We are bleeding cash as an industry.”
U.S. venture firms invested $60 billion more than they returned last year, marking the largest deficit in PitchBook’s 26-year dataset. This imbalance has strained relationships with limited partners like university endowments and pension funds, who are used to seeing substantial profits from the VC industry.
AI Boom, but Exit Bottleneck
Much of the recent surge in VC funding has been directed toward artificial-intelligence startups, a rapidly growing sector with soaring valuations and significant cash burn. Despite optimism around AI, exits remain rare. Startups like OpenAI, valued at $157 billion after raising $6.6 billion last month, face growing pressure to pursue public listings.
“I hope and expect the next step for OpenAI would be to go public,” said Brad Gerstner, founder of Altimeter, whose firm invested $250 million in OpenAI’s latest funding round.
Yet IPOs are few and far between. There are over 1,400 startups valued at $1 billion or more, known as unicorns, and many are far older than the typical startup lifespan. Bill Gurley, a partner at Benchmark, noted, “There are companies that are 13, 14, 15 years old. This is beyond any historic standard.” At the current pace of IPOs, it could take more than 20 years for these unicorns to go public.
A few companies, such as ServiceTitan and Klarna, are preparing IPOs in the coming months. However, these exceptions do little to alleviate the broader bottleneck.
Acquisitions Grind to a Halt
Acquisition deals, another key exit route, have slowed to a near-standstill. Heightened regulatory scrutiny under the Biden administration has made tech companies wary of pursuing large deals.
Last December, Adobe abandoned its $20 billion bid to acquire design startup Figma, citing regulatory obstacles. More recently, Google shelved a $23 billion deal to acquire cybersecurity startup Wiz due to concerns over prolonged approval processes. Both startups turned to tender offers, allowing employees and early investors to cash out without going public.
The incoming Trump administration may change the regulatory landscape, with some investors hopeful for a more business-friendly approach. “Many investors are betting this administration will take a free-market approach to M&A,” said Alex Clayton, a partner at Meritech Capital. “Whether they’re right or not, time will tell.”
Creative Solutions for Investors
Amid the exit drought, VC firms are exploring alternative strategies to return value to their investors. Private-equity buyers are stepping in, and some VC firms are buying stakes in their own portfolio companies. For example, in September, Sequoia Capital purchased $861 million worth of its own shares in Stripe from older funds, giving early investors a profit while holding the shares in newer funds.
Stripe, valued at $50 billion, is among the most valuable U.S. startups, alongside SpaceX and OpenAI. The company has repeatedly delayed its IPO, opting instead for large funding rounds and employee buybacks.
The challenges facing the VC industry highlight a paradox: while investment in tech remains robust, the avenues for realizing returns are increasingly constrained, forcing firms to innovate or wait for regulatory and market conditions to improve.
