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Startup funding crunch likely to persist as venture capital firms struggle to replenish their coffers

Many startups hope that the gradual opening of the IPO window and the prospect of interest rate cuts later this year will finally encourage venture capital firms to be less stingy with capital.

But the process of raising money for startups isn’t likely to get much easier anytime soon, largely because of venture capitalists’ own funding challenges.

U.S. venture capital funds raised just $9.3 billion in the first quarter, PitchBook data shows. At this rate, venture capital funding will be just over $37 billion by 2024, the lowest level since 2013 and down 54% from last year.

Like startups, venture capital firms work to attract new capital from their backers, called limited partners, such as endowments, foundations and pension funds. A sharp decline in IPO and M&A activity over the past few years means limited partners receive meager cash distributions from venture capital funds’ investments.

“We are coming out of the 2020-2021 period, [LPs] Fear of missing out, so eager to enter venture capital. ” high vision strategy, an asset management company that invests in venture funds. “Now they’re licking their wounds and saying, ‘Oh no, I invested at the top of the market. It’s going to be a while before I see any distribution.”

Other limited partners said they would be extremely cautious about investing until there is a sharp rebound in startup IPOs. Reddit‘sand Astra Labs A successful product isn’t enough to get LPs excited about venture capital again.

Brand-name companies will continue to raise capital, but they may have less to invest in startups than in the past. Take IVP for example. The 43-year-old venture capital firm closed a $1.6 billion fund last month, down more than 11% from the $1.8 billion it raised in 2021.

But for smaller and newer venture capital firms, attracting new capital from limited partners isn’t as easy. “I think a lot of people are likely to exit the industry over the next few years,” said Chris Douvos, managing director at Ahoy Capital, which invests in funds and startups.

While this isn’t great news for existing startups, it’s not all doom and gloom. PitchBook estimates that the amount of dry powder money VC firms still need to invest from previous funds remains high.

However, this amount will be reduced unless the limited partners open their coffers again.

“Low quarterly funding won’t determine the future of venture capital,” said Kyle Stanley, chief venture capital analyst at PitchBook. “But if it continues, it will be a hit to deals.”

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