Three ways venture capital is evolving

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This article originally appeared in Forbes.

Last year was a challenge for many in private capital. TechCrunch reported that total venture investment in the third quarter of 2023 was $73 billion, falling more than $25 billion from a year earlier and 65% from the record highs set in the fourth quarter of 2021.

As investor focus has shifted from companies that pursued growth-at-all-costs to those with solid traction and a path to profitability, fewer deals met the new threshold for investor appetite. But things are shifting again. The promise of interest rate cuts in 2024 is offering a glimmer of hope, at the same time that many of the startups that last raised at the peak of the market will soon need to raise again.

Here are three ways that the dealmaking landscape is likely to evolve in 2024.

VCs will proceed with cautious optimism

Vivek Ramaswami, a Partner at Madrona Venture Group, told us: “You can feel the shift happening of seeing more deals in Series B+ stages. It's getting people excited; there’s an element that things are coming back.”

The dominance of AI as an area of investment is set to continue, and large-scale infrastructure projects driven by President Biden’s Inflation Reduction Act will spur investments in the climate tech space.

Yet investors are spending more time than ever researching deals—a figure that jumped by 29% in a year. There may be a sense of optimism in the market, but investors have learned to act with caution. The stakes are high after a tough year for their bottom line.

Relationships and brand trust are critical to doing deals and fundraising

From early 2023 to 2024, priorities shifted for many dealmakers. Whereas last year the emphasis was still on sourcing (there was, after all, a record volume of dry powder and interest rates had not yet peaked at their highest level in decades), the focus today is very much on expanding networks and strengthening existing relationships. The proportion of those choosing deal sourcing as a top priority dropped from 39% to 30%, whereas network building shot up to 33% from 19%.

An investor’s network is their livelihood, and the best firms are adept at using every partner and associate’s network as a collective to gain access to the best opportunities at the optimal time. Today, most VC and PE investors are doing this by centralizing all the real-time network data that sustains relationships across their entire firm—using technology to ensure their team can operate efficiently without duplication or manual data entry.

AI combats deal complexity and competition

It’s a question we hear time and again from investors: “How do we take all of our qualitative research and pair it with our structured data in a way that makes us all better at our jobs?” (asked here by Andrew Cafourek, Head of Technology at Anthos Capital).

The answer, increasingly, is AI.

With the average firm analyzing 4+ data sources when researching a deal, any tool that can help consolidate that data and draw insight is a hugely helpful timesaver. Of the investors we surveyed, 84% plan to adopt more AI across their workflows in 2024.

How this manifests will differ by firm but trends are emerging. Firms want to drive productivity by automating daily tasks (63%), accelerate researching companies of potential interest (55%), and ultimately decide whether or not to invest in a company (40%). While the investor’s intuition will always play a role in these important decisions, AI can help streamline the deal research process and allow investors to reach data-backed decisions on which deals to pursue faster than their competitors.

As always, there remains the activities that will never be automated away. With investors freed up to dedicate even more time to relationship-driven strategies like network building, deal management, and hands-on support for portfolio companies, we’re likely to see increased productivity that reshapes the landscape in the years to come.

Ray Zhou
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