Capital Continuity: The What, Why, and What’s Next of Venture Investing in 2024

Prevailing investment practices from 2023 spill over into early-2024: the 2023 Annual Venture Report illuminates key themes shaping the built world investment terrain. Marked by record-breaking deal counts and valuations, the report underscores Infrastructure Tech as the standout performer, propelled by a staggering $1.2 trillion in US public sector funding and a strategic flight to quality startups amid a challenging venture market influenced by interest rates.

Key Themes from the 2023 Annual Venture Report

  1. In 2023, built world venture activity outperformed the prior year in both deal count and deal valuation, reaching new highs.
  2. Among the three BuiltWorlds Venture categories (click here for more detail on BuiltWorlds Venture & Investments categorization), Infrastructure Tech was the only category to outperform the prior year.
  3. Later-stage investments garnered both a higher deal count and more capital inflows than early-stage investments in the second half of 2023.
  4. Startup valuations remained low as high-interest rates heavily discounted the terminal value of early-stage startups.
  5. VC dry powder in the space remains at an all-time high as general partners (GPs) continue to be judicious with their capital.
  6. Amidst the scarcity of liquidity and exit opportunities, private equity (PE) dry powder is accumulating for reasons akin to those witnessed in the VC market. The stagnant M&A market further constrains the prospects of exits for venture investors.

The What: Infrastructure Tech, The Big Winner

The 2023 Annual Venture Report explored the boom in infrastructure investments that buoyed the new highs achieved in built world venture capital. Over the last year, investors have sought reprieve from a challenging fundraising environment through proven, later-stage investments and well-funded Infrastructure Tech plays. $1.2T in US public sector funding earmarked for US infrastructure investment has found its way to startups, acting as a countercyclical hedge for venture investors. Well-funded later-stage Infrastructure Tech startups attracted more venture dollars than early-stage ConTech and Building Tech startups that were favorable in 2022.

A later-stage startup that is valued on an earnings or revenue multiple is less sensitive to interest rates because the valuation model relies less on the discounted future cash flows of the business to achieve a terminal value. This fundamental methodology led to the flight to quality startups in late-2023.

The Why: Government Funding

According to the US Department of Transportation, “The Infrastructure Investment and Jobs Act (IIJA), aka Bipartisan Infrastructure Law (BIL), was signed into law by President Biden on November 15, 2021. The law authorizes $1.2 trillion for transportation and infrastructure spending with $550 billion of that figure going toward 'new' investments and programs.”

Proof-of-concept and revenue-generating Infrastructure Tech companies attracted higher deal counts and higher deal valuations as built-world investors looked to avoid down-rounds in ConTech and Building Tech investments that were seen as riskier. Clean energy and EV charging solutions became a safe haven, attracting an outsized proportion of Infrastructure Tech investment dollars thanks to Uncle Sam funding these companies from inception.

The Why: Macroeconomic Factors

The US economy grew at a 3.3% pace, beating expectations, while inflation did not react, providing yet another signal of the Fed pulling off a soft landing. The personal consumption expenditure (PCE) excluding food and energy, the Fed’s preferred long-term inflation gauge, rose by 2.0%--which is the Fed’s target rate--in Q4 of 2023.

US GDP expansion mixed with targeted 2% inflation creates a favorable macro scenario, but the positive growth may be masking a bubble. The Q4 GDP growth was underpinned by a strong consumer spending rate; however, much of this consumer spending was financed on credit and personal loans, which carry heavy interest rates at present. Economists will closely monitor personal loan and consumer credit delinquencies going forward.

On top of strong GDP data, the US economy added 353,000 jobs in January, nearly double what economists had projected.

The What’s Next: Early-2024 Trends

The first month of 2024 has revealed more of the same undertones in built-world investing. Infrastructure Tech continues to dominate in both deal count and capital inflows. Infrastructure Tech has attracted $1.4B across 20 investments in the first month of 2024. In contrast, Building Tech has accumulated $470M across 13 deals, while ConTech has $208M between 10 deals. 2023’s Infrastructure Tech proclivities show no signs of abating as the space is flush with capital, and low valuations in Building Tech and ConTech are furthering investment hesitancy. However, rate cuts could be seen as early as the second quarter of 2024 due to better-than-expected US GDP and employment data in Q4.

Federal Reserve Chair Jerome Powell regards March rate cuts as unlikely while the Fed is still waiting for continued strong economic data before cutting interest rates. If the Fed does not cut rates at the FOMC meeting in March, the next opportunity will be in May, and the more the can gets kicked down the road, the less likely it will be that the Fed executes all six rate cuts planned for 2024. Some banks still remain optimistic that rate cuts will start in March, however, we’re planning for a hold until May.

What does this mean for built world investing? Click here to read the full report to learn more.