A first look at the enterprise capital dealmaking environment in Q2 2024 revealed it should proceed to face headwinds, based on Book of ideas and National Venture Capital Association.
VC Principal Analyst Kyle Sanford and EMEA Principal Private Equity Analyst Nalin Patel shared their first insights into the Q2 2024 Venture Monitor report.
They noted that at a global level, inflation, rates of interest and macroeconomic uncertainty have limited deal-making by VC firms.
“While deal value has increased due to a few large, above-average deals, the overall deal environment is struggling,” Sanford and Patel said. “A large number of VC-backed companies around the world are under pressure from lower available capital, and many companies are being forced to return to the market to raise more private funding because exits cannot be achieved.”
Lil Snack & GamesDefeat
GamesBeat is excited to partner with Lil Snack to create games tailored specifically for our audience! As gamers ourselves, we know this is an exciting option to engage with the GamesBeat content you already love. Start playing games now!
Fundraising data has been particularly slow, marking the 12 months with the lowest total commitments since 2015. The slowdown is exacerbated by the high rate of re-commitments to the strategy that global LPs have executed on over the past few years, as investors (particularly in 2021 and early 2022) have returned and raised recent funds at a much faster pace. Now that distributions have slowed, many LPs are facing an inability to re-commit to unbalanced portfolios.
The global enterprise market is lacking mid- to large-scale mergers and acquisitions (M&A). Acquisition volumes remained relatively high, although most deals were small.
The market is ripe for technological consolidation and pricing opportunities, but larger deals have been spurned resulting from the need for immediate bottom-line impact that many acquisitions have didn’t deliver.
Latin America has been slow to see deals this 12 months, likely resulting in the slowest 12 months for deal activity since 2018. Caution over the high volume of deals in 2021 and 2022 that resulted in few exits, in addition to the withdrawal of U.S. investors from the market, have led to a slowdown in the market.
Latin American exits are at the same pace in terms of volume as 2023, which was the slowest 12 months for exits since 2018, generating lower than $36 million in value in the first half of the 12 months. If the pace continues, it should be the lowest 12 months for exits from Latin America since 2016.
US transaction activity has increased
U.S. deal activity has increased in numerical terms in each of the past three quarters. That’s a positive sign that deals are getting done, but the prolonged slowdown in exits is putting pressure on corporations to return to a market that’s less forgiving than the one they’re used to, Patel and Sanford said.
Relatively lower growth in deal value (quarter-on-quarter growth this quarter was driven by CoreWeave and xAI deals) indicates lower capital availability in the market.
Exits remain elusive. The surge in exit activity was driven by small deals. Only $23.6 billion in exit value was generated in Q2, down from Q1. The IPO market faltered in its restart, despite two high-profile IPOs in the first month of the quarter.
For VC returns to extend, big tech corporations need to start out going public at a faster pace than in the first half of the 12 months. Exit value is faster than in 2022 and 2023, but outside of those years, the market is facing its lowest exit count since 2016.
US fundraising shows the impact of the prolonged slowdown, with just $37.4 billion in commitments in the first half of the 12 months. The total was led by big, branded firms. Of that total, Andreessen Horowitz raised greater than $7 billion, with Norwest Venture Partners and TCV raising one other $3 billion. A billion dollars in funds were raised, but potentially at the expense of smaller, emerging managers.
Europe is resilient
European VC deal activity in Q2 was resilient and in line with recent quarterly results, with an increase in deal value despite lower deal volume.
Looking at the first half of 2024, VC deal activity in Europe declined barely from the pace set in 2023. The mixed picture reflects the current deal environment, with deals continuing to shut despite volatile macroeconomic indicators and geopolitical uncertainty across the continent.
European exit activity was subdued in Q2 and fell further from the low levels seen in Q1 2024. If the pace seen in H1 2024 continues, it could see exits reach their lowest level in a decade by year-end.
Despite the stock market gains, the lack of exits will be attributed to several negative aspects. For example, previously VC-backed corporations that have gone public in recent years have shown weak growth. In addition, the current appetite for exits has been tempered by uncertainty about realistic market valuations. Investors are still waiting for a rebound that has yet to materialize, Pitchbook and NVCA said.
European VC fundraising was solid in the first half of the 12 months, although barely lower than in 2023. Fundraising has slowed since 2021 as a tougher environment for GPs and LPs has emerged. Fundraising tends to be uneven across VC ecosystems and is supported by large fund families led by established brands. Accel and Creandum closed large funds in the first half of the 12 months to assist boost performance in Europe.