How long is the soft landing going to impact VC fundings?
In a recent VC workshop conducted by the busiest names in Silicon Valley, there were significant discussions about a few specific topics. AI was definitely on the list, with the downturn being the next most talked-about topic. We were among the journalists allowed to interact with the VC folks, and most of the questions targeted AI and its impact on the VC space. The VC folks discussed AI's various effects on the landscape and how players like OpenAI are changing the funding game.
We at SOS understand that AI will play a significant role in the upcoming days. We also believe that the world will not be the same anymore. But forget AI for a moment, and let's concentrate on the funding scene for the year 2024.
Downturn everywhere
2023 could have been a better year for Tech. It was a bad year for those working in the tech field and for those running startups in the tech field. Capital was scarce, and some of the founders were forced to lay off employees to conserve cash. According to a stat, the 2023 VC funding dropped by 40% in the United States of America. Also, the smaller deals (in the range of $1m to $20m, have reduced by 27% compared to the previous year. More mature startups have garnered more capital without issues than smaller ones.
AI is killing the market for others.
The capital has been flowing towards AI and its related sectors rather than how it was during 2021 and 2022. During the COVID era, the capital flew into companies more geared towards online spaces and those that help organizations run their businesses remotely. Now, the scenario has changed completely, and as more companies are moving to work from office mode, the capital has been diverted to somewhere else: Artificial Intelligence. Although AI is hot right now, the caveat is that the entry barrier is high, making the closing process challenging for smaller funds. LPs find it tough to close deals other than AI because that is where the trend is, but smaller capital cannot make a big dent in the AI universe. It's a catch-nine situation for more VC funds. However, due to their behemoth natures, more prominent players like Sequoia have a field day when closing deals in the AI space.
Recession predicted, soft landing assumed
Some of the more prominent publications predicted a recession in 2024, while the US government has been maintaining that there will be a soft landing. The case for a smooth landing has been the strongest, and significant indicators imply that there will not be any recession. Rate cuts are delayed, however. With elections on the horizon for big democracies like the USA and India, there are some uncertainties in the market regarding what the new governments will do. Also, VCs are much more holding their cash reserves close to their chests and storing the resources for a rainy day. When is that rainy day, you ask? 2025 will be the year when most of the funds available with the VC firms will be utilized to the maximum, and you can expect a massive influx of deals across the global scale. We also believe that deals will start rolling towards AI, but other industries will make a mark once the AI market has saturated.
So, if you are a startup founder, keep your chin up and survive until 2025. Your El Dorado could just be waiting for you.
