The global backdrop remained complicated in 2023 as geopolitical headwinds dominated the headlines with the war in Ukraine, slowing China growth, and the Israel-Hamas conflict driving uncertainty. On top of this, inflationary pressures, and the Feds' desire to try and orchestrate a soft landing had investors scrambling to try and read through the tea leaves.
However, the US economy and the equity markets, in general, held up surprisingly well. The S&P 500 rose 26.4% (including dividends), marking its biggest rally since 2019. Large-growth stocks led the way with the so-called “Magnificent Seven” contributing to nearly half of the stock market’s gains. Bonds suffered through most of the year with the 10-year Treasury yield rising above the 5% level for the first time in 18 years on concerns of continued rate hikes. However, sentiment shifted in Q4 as investors started pricing in multiple rate cuts in 2024, driving bond yields lower and stocks to record highs.
VC deal activity was down considerably from levels we saw in 2021 and 2022, both by count and capital deployed. However, upon digging in a bit further, quarterly deal counts have stabilized over the past year, which is encouraging and shows innovation is not stopping. We are seeing particular interest not only in AI, but also in areas like healthcare, biotech, and defense. It’s not surprising to anyone that exit activity was pretty much non-existent. But with 51,000 VC-back companies now remaining private, all eyes are on the capital markets. Clearly, there is no shortage of backlog looking to exit. The fundraising environment remained challenged, but not closed completely. There remains a fair amount of dry powder remaining from the large fundraising years of 2022 and 2021.
Given the recent shift in sentiment as inflationary pressures ease and interest rates decline, we remain optimistic that activity will increase in the venture landscape and capital will continue to flow into the sector.