Venture Capital Just Hit Quality-Over-Quantity Mode. Here’s What That Means for New Founders

Raising venture capital for your startup hasn’t gotten easier in 2024.

Though VC firms are investing more dollars compared to a year ago, investors are taking a quality-over-quantity approach, backing only companies with demonstrably strong performance, according to a second-quarter report from the research firm PitchBook. The value of U.S. VC investments during the second quarter of 2024 reached $55.6 billion, up from $35.4 billion during Q2 2023. Meanwhile, the number of deals fell from 3,670 to 3,108, though the actual count may ultimately turn out to be well over 4,000, the firm estimates, once new data comes to light.

“The peak of the Covid-19 pandemic saw unprecedented levels of investment in a variety of technologies such as early-stage blockchain, autonomous vehicles, virtual reality, AI, and others,” Bobby Franklin, chief executive of the National Venture Capital Association trade group, wrote in the report. “The initial flood of investment into these technologies has largely abated, and now investors are focused on supporting their most promising companies to maturity amid a historically challenging exit environment.”

What deals do materialize are trending larger, which the NVCA executive says is probably a result of investors “placing a premium on confidence,” so that founders with proven track records enjoy a leg up in securing capital. It’s a trend that could make things difficult for early-career entrepreneurs.

“First-time founders may not have prior exits to boost their appeal, so other elements will be essential to prove to investors that their capital is well-placed,” Emily Zheng, senior VC analyst at PitchBook, told Inc. via email. “Startups looking to raise their first round should expect longer fundraising timelines, more inquiry into their product-market fit and the team’s prior experience, and negotiations for increased investor protections,” Zheng adds.

When it comes to early-stage deals, there’s still some reason for optimism. PitchBook’s data shows that this quarter’s early-stage deal count was the highest it’s been since the first quarter of 2022, and that early-stage deal value saw a 74.8 percent boost compared to the first quarter of the year. (The report attributes some of that growth to Elon Musk’s artificial intelligence startup xAI securing a $6 billion Series B round.)

Nevertheless, investors seem to be shifting their focus toward meatier deals, with PitchBook reporting that, this quarter, the share of pre-seed and seed deals that were under $1 million was the lowest it has been since 2015. Meanwhile, out of the overall deal tally, the number of pre-seed and seed deals valued at $10 million or more was the highest in PitchBook’s dataset.

“The shift toward larger deals at the earliest stages of venture is likely due to a higher selection bar of new deals,” the report says. “VCs have become cautious and are committing to only high-quality companies that show a promising trajectory to hit product-market fit, as opposed to investing in numerous smaller deals.”

Software, pharma/biotech, and IT, as well as consumer goods and services, were all sectors that saw more VC deal activity this quarter than they did a year ago during the second quarter of 2023. Software, for instance, more than doubled — from $13.6 billion to $29.7 billion.

But other sectors, including energy and transportation, saw small decreases within that time-frame.