Venture Capital

The VC industry is in a constant state of flux as a result of bear and bull markets, government legislation, business trends, the emergence of competing funding sources, changes in VC firm organizational structure, and many other factors. Additionally, some investment sectors remain hot, while others (such as clean tech) have their moments in the sun before the next “big thing” comes along.

One hot sector in VC is funding for artificial intelligence (AI). While generative AI companies like OpenAI and Anthropic have garnered most of the headlines, there are a raft of other companies working on a wide variety of enabling, commercial, and consumer-facing applications,” according to the National Venture Capital Association. Venture capital firms are also using AI and machine learning to better manage data and improve efficiency regarding deal sourcing, funding decisions, and other operational areas. Venture capital firms are also funding startups that are developing blockchain technology, which is a distributed ledger database that uses advanced cryptography to maintain a continuously-growing list of financial records that cannot be altered. Finally, the rare disease and orphan drug startups sector remains strong, and many VC firms are exploring or continuing to fund startups in this area. (Orphan drugs are pharmaceutical products that are used to treat rare diseases.) The global rare disease treatment market reached more than $195 billion in 2022, according to Global Market Insights. Its market value is expected to reach $435 billion by 2032.

Another trend is that the epicenter of the venture capital world begins to shift away from the U.S. Back in 2008, nearly 75 percent of the world’s financing of cutting-edge, tech-oriented startups and young companies occurred in the United States. Since then, American funding dominance had begun to wane to some degree, although its percentage of global deal flow has increased recently. Venture capital firms in the U.S. accounted for 49 percent of global VC deal flow (by dollar amount) in 2023 (the highest level since 2014.). In contrast, U.S. venture capital firms accounted for 79.6 percent of global VC deal flow in 2007. These are only a few of the trends and developments that will shape the future of the VC industry.

Organizational Changes

The organizational structure of venture capital firms is evolving. In the past few years, VC firms have hired more associates—sub-partner personnel. (This is a good thing for eager MBAs attempting to enter the competitive venture capital industry.) Previously, most firms had little support other than their own network of professional contacts out in the community. Then companies like Summit Partners, TA Associates, and Battery Ventures built effective, high-return VC firms by relying on junior-level personnel. Associates became experts in niche markets, providing value with the sheer depth of their understanding.

Combining deep, narrow knowledge from associates and broad business and strategic knowledge from general partners has proved to be a very effective model. Another organizational change to VC has resulted from the trend of venture capital firms to become more proactive in ensuring the success of their investments. Some sizable VCs are adding early stage functional experts to their firms in areas like mergers and acquisitions, executive recruiting, public relations, market research, and operations. These in-house personnel allow the venture capital firms to add more value, assert more control over the life of the investment, and increase the possibility that the portfolio companies become successful.

Smaller Versus Large VC Firms

In the past decade, the number of smaller-scale venture capital firms has increased. “Those funds play an important role in the growing diversification of the venture landscape, deploying capital to nascent companies that may operate outside of the largest four ecosystems in the U.S.,” according to PitchBook’s Venture Monitor, Q1 2024. “In this regard, those funds help propel the overall dealmaking momentum, writing checks at the earlier stages such as seed, and supporting entrepreneurs in parts of the U.S. that struggle to compete with the two coasts in terms of infrastructure, talent pool, and capital availability.” Additionally, cloud technology, smart phones, and other IT breakthroughs have made it much less expensive to launch a startup today, and an increasing number of micro-venture capital firms—which provide small amounts of funding and/or offer specialist funds (e.g., consumer, technology, health care, and financial services)—are emerging to provide seed funding to these companies. In 2023, there were 2,152 VC firms in the U.S. with less than $250 million of assets under management, according to the National Venture Capital Association.

Although small-scale firms play an important role in the VC ecosystem, Venture Monitor, Q1 2024 says that they “ultimately cannot replace large players in terms of the latter’s ability to write large checks to mature companies or startups operating in certain sectors such as biopharma that need significant cash infusion to facilitate growth or proceed with expensive research and development projects.” There were 609 VC firms in the U.S. with more than $250 million of assets under management in 2023, according to the NVCA. A total of 179 of this number had AUM of at least $1 billion.

Corporate Venture Capital Units Facing Challenges

The corporate venture capital (CVC) market has contracted in recent years—especially in the United States. In the U.S., the number of CVC deals and funding amounts decreased from 1,859 deals and $98.9 billion in funding in 2021 to 1,210 deals and $30.8 billion in funding in 2023, according to CB Insights’ State of CVC 2023 Report. Additionally, the average deal size for global CVC deals decreased from $44.8 million in 2021 to $21.2 million in 2023. Fewer new CVCs are also being formed. In 2023, just 162 CVCs were founded—a six-year low. “The overall decline in CVC investment reflects a number of factors, including the challenging economic environment which has driven many corporates to focus on shoring up their core businesses and improving their operational efficiencies,” according to the professional services firm KPMG.

It’s important to note that CVCs continue to play a major and active role in the venture capital industry. Corporate VC players “participated in 24.1 percent of all U.S. VC deals by deal count, denoting an uptick from the 2023 annual level of 22.8 percent, albeit remaining slightly below pre-pandemic figures,” according to Pitchbook’s Venture Monitor, Q1 2024. Software and commercial products and services received the two largest two shares of deployed capital from CVCs.

CVC activity in Japan remains stronger than in many other countries. CBInsights reports that the most active corporate venture groups in Quarter 4, 2023, were:

1. Mitsubishi UFJ Capital (Japan)
2. SMBC Venture Capital (Japan)
3. Mizuho Capital (Japan)
4. Google Ventures (United States)
5. KB Investment (South Korea)
6. Samsung NEXT (United States)
7. SBI Investment (Japan)
8. Mitsui Sumitomo Insurance Venture Capital (Japan)
9. SDIC Venture Capital (China)

Google has become a major player in corporate venture capital—and, at the same time, annoyance to some of the more established VC firms along the way. The tech giant’s subsidiary Google Ventures is scooping up upstart tech companies at a relatively bargain-basement price, giving itself new opportunities by luring entrepreneurs with its name while boxing out venture capitalists at the same time.

Horizons Brighten Overseas

The number of U.S.-based VC firms and corporate VC units investing overseas continues to increase. The increasing globalization of VC means those hoping to enter the field must not only have a firm grasp of where the U.S. economy is heading, but also know that there are opportunities offshore that will reap big windfalls for venture capital firms. For the most part, it means budding venture capitalists must keep a watchful eye on more than just the current VC climate. Research about current trends inside the U.S. economy, the IPO market, and the overseas markets remains essential for securing that first job.

Beijing, China, is one of the most preferred non-U.S. VC funding destinations in the world. “China has emerged as a key player in venture capital, with hubs in Beijing and Shanghai,” according to HubSpot for Startups. “Other regions showing increased VC activity include London, the United Kingdom, Berlin, Germany, Tel Aviv, Israel, Bangalore, India, Tokyo, Japan, and the Nordic Region, specifically Sweden and Finland.”

Generative AI Grabs the Attention of the VC Industry

Generative artificial intelligence (AI) is a form of machine learning algorithms (including large language models) that can be used to create new content (including text, simulations, videos, images, audio, and computer code), as well as analyze and organize vast amounts of data and other information. Venture capital firms and other companies are using it in-house in such areas as advanced data analytics, operations, human resources, and legal services. Generative AI is still in the early stages of use and development, and the security risks, ethical issues, operational challenges, and the accuracy of content produced by generative AI must be addressed before it can be widely adopted. Some people are also concerned that generative AI will reduce the need for certain types of human workers. “As with every new technology, the rising adoption of AI will inevitably render many jobs at a PE or VC firm obsolete,” according to PitchBook. “Administrative roles in particular are most likely to be impacted.” On the brighter side, the use of generative AI will create new occupations. These include generative AI engineers and software architects, utilization directors, implementation specialists, product and adoption managers, quality controllers, editors, and output auditors.

Venture capital firms are extremely interested in artificial intelligence startups, especially those that focus on generative AI. This technology remains a “particularly hot area of interest for VC investors, both in terms of large language model driven solutions and solutions aimed at building generative AI capabilities into business verticals in order to drive real results and efficiencies,” according to KPMG’s Q1 2024 Venture Pulse Report—Global Trends.

The Growing Use of Data Analytics and Alternative Data

Venture capital fund managers and analysts have always collected and assessed data to learn as much as possible about specific industries, emerging technologies, target portfolio companies, and industry trends. In addition to data analysis, each VC professional brought his or her own knowledge and expertise to the table when making multi-million-dollar decisions regarding deal sourcing, screening, evaluation, funding, and exits. But the growing size of venture capital funds, the increasing amount and variety of data that can be harvested, the emergence of artificial intelligence (including generative AI) and machine learning in the data acquisition and analytics processes, and other factors are making data analytics an integral part of VC operations—but especially in large firms with more operating capital. Some funds are developing their own data analytics software, others are purchasing portfolio companies that offer this technology, while still others are building or expanding in-house data science and analytics teams that are separate from information technology departments. Many smaller venture capital funds are hiring consulting firms with knowledge of the VC industry, the firm’s particular investing focus (medtech, renewable energy, vaccine development, etc.) and data collection and analytics acumen to tackle their data needs.

Another trend is the practice of using data analytics tools to collect and study alternative data to identify potential investment targets, use new financial metrics to determine valuations, and to obtain other benefits over their competitors. Alternative data, which is also known as next-generation data, is nontraditional and non-market economic and financial information, such as business performance metrics, online reviews, consumer spending/lifestyle data (including payments data), weather patterns, satellite imagery, and social media trends.

As a result of the increasing use of traditional and alternative data, demand is growing for VC professionals with expertise in data collection, warehousing, and analytics, as well as knowledge of how artificial intelligence and machine learning can be used in regard to data and for other purposes.