Over the past few years, we’ve witnessed the meteoric top of the venture and startup markets where valuations were through the roof, investors were competing with each other on speed (instead of due diligence), founders were exclusively focused on raising the next round, and startups had an almost unlimited source of capital to pursue growth at all costs.

Those days ended with a series of significant blows to the ecosystem including the Silicon Valley Bank collapse, global wars and rising interest rates.

Now the industry has settled into a new, healthy normal where valuations have returned to reasonable levels, only the highest-quality startups are able to attract significant capital, due diligence has come back into vogue as investors slowed down, and capital efficiency is again the name of the game for startups.

Glimmers of hope have emerged: Global markets have held, IPOs are thawing, crypto has rebounded and AI is booming — all signals of renewed investor interest.

As the doom and gloom continues to subside we are all wondering: What is the Goldilocks scenario that investors and founders are hoping for?

Investor sentiment

I spent the past few weeks learning what other venture investors think this outcome would require. I discussed this with Courtney McCrea and Matt Cohen, managing partners at Recast Capital and Ripple Ventures, respectively, to understand if other fund managers share my optimism.

“The ecosystem needs liquidity. IPOs need to begin happening again, interest rates must come down, or public markets need to grow. Any one, or ideally, all of these things, need to start happening for the venture ecosystem to rebound,” McCrea told me. “Venture capital is all about the long game, so some patience will be required.”

The general consensus is that first and foremost, IPOs need to start happening again, and recent signals from Reddit and Astera Labs indicate they might.

The liquidity events brought by IPOs are the lifeblood of venture, and once venture investors across all stages start getting capital returned, they can return capital to LPs, create new funds and make new investments across the startup ecosystem.

As that foundational cycle continues to show more strength, the momentum of the ecosystem increases and another cycle begins.

“Fund managers are seeing some long awaited signs of life from the market, despite the myriad of headwinds. Startups are getting more efficient and profitable while a great deal of froth has been removed from the market. There’s a palpable sense of optimism emerging that the Goldilocks scenario might just occur,” Cohen told me. “Whether it materializes has yet to be seen, but I’ve seen more optimism emerge in the last month than I did in the last year.”

Reaching Goldilocks

Inevitably, the most crucial piece of this puzzle is the interest rate and macroeconomic climate. If global markets are able to avoid a recession and interest rates are able to be managed in a way that fosters continued growth under tighter monetary controls, then institutional capital will once again flow toward growth.

In a world where IPOs are consistently rolling and fund managers are showing strong performance, the venture and startup ecosystems will be in the Goldilocks scenario.

It’s a uniquely interesting time to invest; the scales seem evenly matched and maybe even slightly optimistic.

This is a prime time to invest, because we may be witnessing the beginning of a renewed bull market. The risks, however, remain persistent with global turmoil continuing to spread.

The conflict in Ukraine remains protracted and new conflict has arisen in Israel. Interest rates are flattening, but remain elevated relative to the previous cycle.

But global markets have remained resilient and a definitive turnaround there — combined with a few more successful IPOs — could provide directional confidence for investors over the coming months.

Marc Schröder is the managing partner and co-founder of MGV, and is focused on working with world-class tech entrepreneurs and establishing the MGV legacy. Before co-founding MGV, Schröder served as the head of global sales at the Maschmeyer Group and was an investor at Seed + Speed Ventures. Originally from the Netherlands, he grew up in South Africa and graduated with a law degree from Bertolt-Brecht University.

Illustration: Dom Guzman