Venture deal flow: Record number of companies seeking financing in fragmented market

This 12 months turned out to be quite positive for enterprise capital funds, which remained dry after the enterprise capital bubble in 2020-2021.

In 2023, we saw a dramatic increase in the number of early-stage startups seeking funding, in addition to a large number of mid- and late-stage companies returning to boost further rounds.

The surge in demand for capital among startups has challenged deal flow for many enterprise capital funds this 12 months – our firm is executing higher than usual volume on quarterly prospects.

At the same time, the market has divided into two very differing types of transaction dynamics depending on the stage of the enterprise and the market sector.

Transaction dynamics

Generative AI technologies have led to an increase in the number of recent businesses and investment opportunities for many people. In the second and third quarters of this 12 months, we evaluated more companies seeking financing than ever before in our history. The only other time transaction volume approached this level of funding sought was in Q1 2021 while the Covid-19 bubble was ongoing.

While volume has increased significantly, deal sources for our company have remained relatively unchanged: roughly one-third of companies in the last two quarters of 2023 were closed through seed funds and other enterprise firms with which we worked. We have also noticed consistency in companies reporting to us from entrepreneurs we have worked with in the past and as part of our own thematic research process.

Today, the qualitative points of deals that we see in the middle and later stages are very different from what we see in the earlier stages.

Late stage reset

In contrast to the optimism surrounding recent AI-powered seed and Series A companies, most later-stage companies are navigating the dynamics of a post-bubble investment round.

These later-stage companies have raised large amounts of capital at valuations based on top-quartile revenue growth plans, during a period of top-quartile valuation multiples. If they have achieved their growth goals while keeping the burn under control, this subset of highly sought-after companies will likely receive buyout offers or simply obtain internal financing to relocate operations. Most later-stage companies, nevertheless, are in a post-bubble reset phase where they need to show a combination of capital efficiency, growth and a willingness to reset valuation expectations for a financing round to come back to fruition.

Looking ahead, we are able to expect a return to more typical early-stage deal volumes as the current wave of AI-focused startups creates an increasingly crowded field. Next 12 months’s narrative will focus on these companies’ products and market traction.

For many mid- and late-stage companies, we expect settlements to proceed into 2024 as their money balances decline and they are forced to finance, sell or liquidate the business. At the same time, 2024 may additionally grow to be known for entrepreneurial success stories as top later-stage companies look to go public or be acquired by incumbents in recognition of the highly successful companies they have built.