For the past handful of years, the venture market has been on a wild ride. From the cheap money days of 2020 and 2021 to the market recalibration in 2022 to some rocky times in 2023, the private market has had its ups and downs.

However, venture capitalists view 2024 pretty optimistically — although with caveats — with funding likely already hitting its low, the exit markets coming back, and a coming to terms with the new normal of work.

While there may be some more pain — startups shuttering and layoffs will likely continue, they say — investors seem hopeful most of the troubles of the past couple of years are behind them. They also see a handful of significant trends evolving in 2024.

Right-sizing

Perhaps the most important thing the new year will bring is a market that has been right-sized, according to many who invest.

“I’m an optimist,” said Navin Chaddha, managing director at Menlo Park, California-based Mayfield Fund 1. “I’m always looking at the upside, but I do believe 2024 should be better than 2023.

“The industry is getting right-sized,” he added.

In the past 18 months or so, venture investing has shifted between large, late-stage growth rounds being down and now early-stage funding taking a hit as the entire market has recoiled from the aberration that was 2021.

Mark Sherman, managing director at Telstra Ventures, said he does not see seed and early-stage rounds continuing to decline much, although he cautions growth rounds will likely move with the public equity market, and as IPOs pick up so will larger growth rounds.

Here come the exits

In fact, the public markets could be the biggest variable for venture this year — which is not unusual.

While many who follow the venture market look at funding numbers, it’s the exits that really make the market go — replenishing the capital pool, as well as serving notice to why playing in the private market is a worthwhile venture.

While it’s common knowledge IPOs were basically nonexistent last year — apologies to Arm Holdings, Instacart and Klaviyo — M&A activity also took a hit.

Per Crunchbase data, M&A activity involving VC-backed companies dipped to just over 1,600 deals last year. While that may not seem low, it pales in comparison to the nearly 2,500 deals completed in 2022 and the more than 3,100 finalized in 2021.

VCs see that changing this year as larger entities get more aggressive.

“Public companies have hordes and hordes of cash they want to invest,” Chaddha said. “Many are sitting on more cash now than they were in ’08-09. Private equity and buyout funds also are sitting on a lot of cash.”

That’s good news for startups, especially many of those that may be facing a difficult funding market.

While most exits for startups are through M&A transactions, the sexier route that grabs headlines, of course, is an IPO, and many expect that market to pick up steam.

“The question always is: Do people want to add more risk in their portfolios?” Sherman said about a potential IPO market comeback.

While there are always unknowable variables — like war — Sherman said the “mellowing” of interest rates and inflation will likely see the market thaw out.

Many already expect some eagerly anticipated IPOs in 2024, such as Reddit, ServiceTitan and maybe even Stripe.

AI slowdown

While one market for investors may open up, another may see slowing, according to many investors.

No sector saw more interest on the private market last year than AI, as generative AI and AI-related startups such as OpenAI, Anthropic and Inflection AI raised big, taking in nearly $50 billion in 2023, per Crunchbase data.

However, many investors are looking for a pullback as valuations remain high and some are questioning how many winners there will be in the generative AI market.

“The best way to think about it is that we’re in a hype cycle that likely will take years to play out,” Sherman said.

Even as 2023 wore on, many investors seemed less and less interested in marketing or sales platforms that just wrapped AI around them.

Some VCs expect the legal and regulatory dilemmas AI companies could face both in the U.S. and overseas to lead to a slowdown in the flood of AI funding startups saw during 2023.

“You are seeing some startups working through some legal implications even now,” said Don Butler, managing director at Thomvest Ventures. “I think some of that will lead to a cooling off when it comes to investment, especially in early-stage AI.”

Niko Bonatsos, a managing director at General Catalyst, said some AI startups definitely raised at inflated valuations and there likely already is regret among some investors.

Of course, companies like Nvidia, Salesforce 2, Microsoft and Google have lots of money and have been extremely active investing in the AI sector, and that could continue as they battle for supremacy in the field.

If they do not, however, one of VCs hottest industries could plummet back to reality.

Layoffs and closings

Most sectors have already crashed back to reality from the heady days of 2021. Big-name and well-funded startups like Convoy and SmileDirectClub shuttered, and more than 190,000 workers at U.S.-based tech companies were laid off in job cuts in 2023, per Crunchbase’s Tech Layoff Tacker.

Many expect that to continue as companies look to reach breakeven.

“You will see more and more stories like Convoy,” Butler said. “Many people have already tapped debt, maybe done two (bridge financings). Now (they) have to face reality.”

Even firms that do not shut down may still slash staff — no matter how big they are.

Sherman said even while large firms like Google, Meta and Microsoft will continue to grow revenue, they will likely have roughly 10% fewer employees five years from now as AI productivity improvements cannibalize growth and absorb roles.

It also likely will not be just startups — but also those that fund them. Many VCs believe the OpenView drama that occurred at the end of 2023 likely is just the beginning of a shake up in the venture capital world itself.

The past several years birthed a lot of new firms, many of which are seeing their investments down on paper after a good number of startups have had to slash valuations. These firms will not be able to raise new funds, forcing some to close.

“The venture industry is constantly evolving,” Bonatsos said. “I think right now you will definitely not see the rate of new VC firms being opened go up. It is very hard to raise that first fund. Even legacy players are going to need to adapt.”

Things can change

Of course, all of these predictions could go sideways, if the unexpected happens. Geopolitical issues, inflation reigniting and several other factors — there is a presidential election in November — could throw the private market into disarray.

However, for now, many who invest in the market seem hopeful 2024 will bring better — maybe just slightly — things than the past couple of years.

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• The Crunchbase Tech Layoffs Tracker
• Forecast: 5 Top Trends In Tech And Startups We’re Watching In 2024, From AI To IPOs
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• IPO Market Ends 2023 With A Whimper Not A Bang