Market Outlook of VC Industry in 2024 Q2 — by Hive Ventures
Global VC Investment Rebounds for three Consecutive Quarters
FIGURE | GLOBAL VC FUNDING MOMENTUM (IN NO. OF DEALS & DOLLARS)
Source: CB Insights
From an investment perspective, global venture capital (VC) investment is on a path to recovery. This trend aligns closely with our predictions from last year. Although the investment levels are still far from the peak reached in 2021, the total investment amount from 2024 Q1 to 2024 Q2 has increased by 13.8%. This is an encouraging indicator of market revitalization. Meanwhile, the number of investment deals has remained steady with little change.
According to data from CB Insights, 28% of the USD$66 billion invested in Q2 2024 went to the AI sector. This is a significant increase compared to 2023, where the annual investment in AI was approximately 14% of the total venture capital investments. This proportion marks a new high for recent quarters, highlighting AI’s continued dominance and its role in driving the current market momentum.
Despite the upcoming U.S. presidential election, the increasing likelihood of Trump’s re-election has begun to clarify market sentiments. Most institutions predict that a Trump victory would lead to more severe tariff wars with China, alongside potential tax cuts and interest rate reductions. These factors have varying implications for the venture capital investment environment.
Lower interest rates generally lead to cheaper borrowing costs, making it easier for startups to secure funding and for investors to allocate more capital to venture investments. Additionally, reducing corporate taxes can increase disposable income for businesses, potentially leading to more investments in innovation and startups.
However, heightened tariff wars with China could escalate inflation, counteracting the benefits of interest rate cuts. This inflationary pressure could reduce overall economic growth, negatively impacting the venture capital environment.
The November election remains a significant variable that could influence market dynamics. Investors and market participants are closely monitoring the political landscape, as the election’s outcome could introduce substantial changes to the investment climate. The dual aspects of potential tax cuts and interest rate reductions versus the risks associated with intensified tariff wars create an environment of cautious optimism.
In conclusion, while AI investments are currently robust and driving market trends, the political and economic uncertainties surrounding the upcoming election add complexity to future projections. Investors must navigate these dynamics carefully to capitalize on opportunities while mitigating risks.
FIGURE | VC INVESTMENT VOLUME Q3 2023-Q2 2024 (IN BILLIONS USD)
Source: CB Insights
When examining regional trends in venture capital (VC) investment, it’s evident that while the United States and Europe are on a path to recovery, Asia continues to experience a decline. This trend mirrors the overall economic trajectories of these regions. The U.S. economy remains robust, whereas China’s economy is facing deflation, which has contributed to the downward trend in VC investment in the region.
In the U.S., Silicon Valley saw the most significant increase in VC investment, rising from USD$15 billion in the previous quarter to USD$17.9 billion, marking a growth of 19.3%. It’s noteworthy that within this surge, Elon Musk’s xAI accounted for $6 billion, and Scale AI accounted for USD$1 billion. This highlights the substantial influence of major players and specific sectors on the overall investment landscape.
In contrast, Europe is also showing signs of recovery, albeit at a different pace compared to the U.S. However, Asia’s continuous downturn in VC investment reflects broader economic challenges, particularly in China, where deflation is a major concern. The economic divergence between these regions underscores the varied impact of global economic conditions on regional VC investment trends.
Overall, while the global VC investment landscape shows signs of recovery, significant regional disparities highlight the need for a nuanced understanding of the factors driving investment flows in different parts of the world. The future trajectory of global VC investment will depend on these regional dynamics and broader economic developments, particularly the recovery of the IPO market, which remains a crucial factor for sustained growth.
Top Global Seed Deals In 2024 Q2
In Q2 2024, the top 10 early-stage investments significantly outperformed those in Q1 2024, with a noticeable increase in deal sizes. While only two seed deals in Q1 2024 exceeded USD$100 million, Q2 2024 saw a marked rise in the average deal size. This trend highlights a growing investor confidence and appetite for larger investments in early-stage ventures.
A striking observation in Q2 2024 is the high proportion of investments in the AI sector, with five of the top 10 deals involving AI companies. Additionally, two deals focused on robotics, underscoring the popularity and growth potential of these technologies in the current market.
Geographically, the distribution of these top deals reflects the dominance of the United States and China in early-stage investments. In summary, Q2 2024 saw a substantial rise in the size of early-stage investments, with a notable focus on AI and robotics, predominantly driven by U.S. and Chinese investors. This trend suggests a robust interest and confidence in these cutting-edge sectors, positioning them as key areas for future growth and development.
TABLE | TOP 10 ANGEL AND SEED STAGE GLOBAL DEALS
Source: Crunchbase
Global Exit Trend Remains Flat
FIGURE | GLOBAL EXITS Q2’21 — Q2’24 (IN NO. OF DEALS AND BILLIONS USD)
Source: CB Insights
The global IPO market remains in a state of flux, showing neither significant decline nor robust recovery. Comparing Q2 2024 to Q1 2024, there has been a modest increase in IPOs, rising from 66 to 82. However, this growth is not substantial enough to be considered a rebound, more accurately described as a stabilization.
Notably, Q2 2024 lacked the presence of large-scale IPOs that characterized Q1 2024, such as Reddit’s. The largest IPO in Q2 2024 was Viking Cruise (USD$12B). Despite this, there is a gradual upward trend in the IPO market. Several unicorn companies are poised for potential IPOs, which could significantly impact the market. These include OpenAI (valued at USD$100 billion), SHEIN (valued at USD$66 billion), Stripe (valued at USD$65 billion), Databricks (valued at USD$43 billion), and Canva (valued at USD$25 billion). Among these, SHEIN, Stripe, and Databricks are the most likely to go public in 2024, while the others may take longer.
The prolonged sluggishness of the IPO market poses challenges for the VC sector. Late-stage investors may become hesitant, which can ripple back to affect early-stage investments. The upcoming U.S. presidential election later in 2024 adds another layer of uncertainty to the market. As a result, significant changes are not expected until the first quarter of 2025, when signs of IPO market recovery may begin to appear. Considering the performance of the investment market and the IPO landscape, we continue to believe that the VC market in the second half of 2024 will remain stable, with neither substantial growth nor decline.
Is AI a Tech Bubble?
In Q2 2024, AI investments accounted for a remarkable 28% of global venture capital investments. This concentration in a single sector is rare, reflecting an intense market enthusiasm for AI. This surge has led many to question whether AI is a tech bubble, like the dotcom bubble of 2000.
To address this, we need to examine several aspects. First, let’s compare the AI wave with the dotcom bubble to see if there are similarities. Second, we should consider whether, like during the dotcom bubble, many AI companies are going public without profitable business models.
TABLE | DOT-COM VS. AI MARKET CHARACTERISTICS COMPARISON
These comparisons reveal that the AI sector’s multiples are much healthier compared to the dotcom bubble’s astronomical ratios. During the dotcom era, many companies had minimal revenue but achieved high valuations based purely on speculative concepts. For instance, Webvan had only USD$400,000 in revenue yet was valued at USD$1.2 billion. Pets.com had USD$600,000 in revenue but was valued at USD$400 million. These extreme valuations without substantial business models led to an inevitable dotcom bubble.
In contrast, current AI companies, while still having high valuations, are based on more substantial business models and longer development periods. Except for C3.AI, no AI company has gone public yet. During the dotcom bubble, many companies went public within 3–4 years of their founding, showcasing the market’s irrational exuberance at the time.
Based on these points, we believe the current AI tech wave is not a tech bubble. While there is certainly some frenzy, the underlying fundamentals are healthier compared to the dotcom era. The AI sector, with its longer development periods and relatively more reasonable valuations, shows signs of a more sustainable investment environment.
In summary, although AI investments exhibit some characteristics of a tech bubble, significant differences in market fundamentals and technological applications suggest a more robust foundation compared to the dotcom bubble. We should remain cautious but optimistic, focusing on the long-term viability of AI innovations.
[1] Wired, Garden.com Flourishes in IPO, Wired, 1999, https://www.wired.com/1999/09/garden-com-flourishes-in-ipo/
[2] Stefanie Olsen, 1999 VC funding tops total from last 11 years, CNET, 2002 https://www.cnet.com/tech/tech-industry/1999-vc-funding-tops-total-from-last-11-years/#google_vignette
