Fewer Small And Midsize Venture Funds Are Closing This Year

By many measures, the current fundraising environment looks challenging for smaller startup investors. That’s reflected in the tally of new funds.

So far in 2024, just 118 small and midsized U.S. startup investors 1 have raised new funds of $500 million or less, per Crunchbase data. That puts this year on pace to deliver by far the fewest new funds in the category in years, as charted below.

The slow fundraising comes, not surprisingly, amid a slow period for exits. Tech IPOs have been dormant for months, and we’re not seeing many M&A deals providing home run returns.

It also doesn’t help prospective 2024 vintage funds that many older vehicles are still well capitalized. Overall venture funding is still far below the 2021 peak, and many that raised during bubblier market conditions turned cautious when the cycle turned.

Per a recent report from Carta, funds raised in the 2022 vintage year had deployed 43% of committed capital at the 24-month mark, the lowest share of any analyzed vintage. The rate of seed-funded companies graduating to Series A has also declined.

Not just fewer funds; less capital too

Not only are investors raising fewer new funds; they’re securing less capital too. This year, a total of $13.7 billion has gone to sub-$500 million funds in our sample set. Again, as charted below, it’s looking like the lowest tally in years.

The contraction comes as average round sizes have gotten larger in recent quarters, which may favor more deep-pocketed funds. Particularly for huge megarounds, like this year’s financings for OpenAI and xAI, large funds provide most of the capital.

Still, smaller funds have long played a crucial role in identifying and backing seed- and early-stage startups that grow into transformational companies. Because they put smaller sums to work, they’re also able to generate solid returns without requiring a billion-dollar exit.

While smallish, 2024 is still an intriguing vintage

While fundraising for small and midsize funds may be slow, it’s not boring.

On the contrary, there’s a pretty exciting assortment of new and follow-on funds ramping up this year. Quite a few are sector-focused in areas including cleantech, life sciences and cybersecurity.

For a sense of who’s raising, we put together sample lists of standouts, including both larger, follow-on funds and smaller newcomers.

Among larger and follow-on funds, standouts include:

• The Engine Ventures, a Massachusetts early-stage venture firm that invests in founders working on “tough tech” problems, raised a $398 million Fund III in June.
• Clean Energy Ventures, based in Boston, closed on $305 million in May for an oversubscribed second fund that will focus on hardware-oriented technologies with the potential to significantly reduce greenhouse gas emissions.
• Ballistic Ventures, based in San Francisco, secured $360 million for an oversubscribed second fund that will invest exclusively in cybersecurity.
• Costanoa Ventures, based in Silicon Valley, announced in September that it closed on $275 million for a fifth early-stage fund and raised nearly $120 million in a third opportunity fund targeting follow-on investments in existing portfolio companies.

For a bigger picture view of $250 million-plus funds that closed this year, we put together a list using Crunchbase data.

Smaller and first-time funds are also part of the mix. Following are a few that raised money this year:

• Beta Boom, based in Salt Lake City, raised a $14.5 million inaugural fund with a mission to invest “everywhere but Silicon Valley,” and a focus on seed and pre-seed startups.
• JFF Ventures, a Boston-based early-stage investor focused on education and the future of work, raised $15 million toward its latest fund.
• Connexa Capital, based in Miami, raised over $20 million for a debut fund that will invest in early-stage technology and software companies.
• Create Health Ventures, closed a $21 million first fund in August. The Austin, Texas-based fund will invest in early-stage digital health startups.

Funds raised in down cycles have a history of outperforming

For those who did manage to close on capital, it helps that there is a history of funds raised in sluggish fundraising environments going on to do quite well.

One of the most famously successful deals of all times — Accel’s lead investment in a 2005 Series A for Facebook (now Meta) — came out of its Fund IX, a downsized vehicle raised in the wake of the dot-com bust.

Another firm well-known for finding success after launching in tough economic times is Andreessen Horowitz. The firm raised its first fund in mid-2009, amid the Great Recession. Things have gone pretty well since.

Whether the newest crop of new funds will follow in these footsteps remains to be seen. But as startup investors tend to be optimistic types, I’m sure the thought has crossed their minds.

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Illustration: Dom Guzman