I’m Saxon Baum, partner at Florida Funders, and, as I do each quarter, I have reviewed the Q2 Pitchbook NVCA data and summarized the findings along with my own insights and Florida Funders’ perspective on what’s to come for the next quarter. Below, venture capital LPs can peek at Florida Funders’ view of the overall market and, more specifically, our view of early-stage VC in Florida and the Southeastern United States.

Liquidity and Returns

Since the first quarter of 2023, we have been in an investor-friendly VC market. Although it has slightly shifted back to being more startup-friendly, it remains the highest it has been in the past decade. We’re now at a place that favors both investors and founders.The venture market's one-year rolling IRR has been negative for the last six quarters. In the second quarter of 2024, less than $30 billion in exit value was generated and distributed back to LPs. Secondary and alternative liquidity options are becoming increasingly significant in this market. Venture investors are creative and scrappy, just like the entrepreneurs we invest in; we are not willing to take no for an answer, so exploring new means of liquidity, such as secondaries, has become widely accepted.Based on public filings and pipeline visibility, 2024 is on track for a year exceeding $30 billion, though activity is expected to taper off towards the election and year-end. This IPO activity is significantly higher than 2023's $19 billion in IPO volumes but still below the pre-COVID-19 baseline trend of $40 billion to $45 billion.

Profitability or Growth at All Costs

The IPO market remains growth-oriented, with growth rates continuing to be a key driver of valuation. This same principle is true in the venture capital space as well. While the "growth at all costs" era might be over, rapidly growing companies are still achieving the highest multiples. The caveat here is that companies need to be able to defend their unit economics and understand how to get to profitability if need be.

Current State of the VC Market

Venture investment activity is stabilizing at levels comparable to 2018 and 2019. Artificial intelligence remains a dominant theme in VC markets, with several multi-billion-dollar raises representing 45% of year-to-date volumes. These mega-rounds are skewing the numbers a bit on the higher side, but that is consistent with how other mega-rounds have dominated hype cycles. This is nothing we’re not used to seeing in the VC world.The GP fundraising environment is becoming more competitive. While capital continues to flow into the market, there is increased scrutiny from investors. LPs are becoming more selective, focusing on funds with a strong track record, clear differentiation, and robust value-add strategies.Florida Funders believes we are well-positioned with a core differentiator based on our geographical focus on the rapidly growing tech ecosystem in the Southeastern US. FloridaFunders currently has the trifecta: the most investor-friendly market in a decade, a focus on the fastest-growing tech region, and several groundbreaking technologies, led by AI, coming to market simultaneously. Learn more about the opportunities to invest with Florida Funders.In the second quarter, $3.3 billion was deployed to pre-seed and seed stages, comparable to pre-pandemic levels. Q2 saw the fewest sub-$1 million pre-seed/seed deals as a share of all deals with disclosed value since 2015. Conversely, pre-seed/seed deals valued at or above $10 million reached their highest level. This reinforces that only the best deals are getting funded, and funds are willing to pay for those deals.The market likely has bottomed out, with companies that raised funds two to three years ago and extended their financing through cost-cutting now returning for subsequent funding. This is evident as quarterly deal counts have climbed to their highest since Q2 2022. The overall upward trajectory of deal size and valuation reflects an investor mentality favoring quality over quantity.

Takeaways

Overall, the market's direction offers modest optimism and appears relatively predictable in hindsight. The market had to adjust to a significant shock, and the first actors to recover have already established a successful track record. Venture capital is still navigating challenging conditions, but experienced hands are finding a way forward.We are observing activity in both the M&A and IPO markets. Although these markets are not fully open, they are beginning to reopen. We have had several discussions regarding portfolio companies generating liquidity through PE recaps or secondary sales. There is a noticeable shift in LP sentiment and GP willingness to take more risks. The market feels reminiscent of 2018 or 2019, which is very positive. While I do not expect a return to ZIRP levels soon, which is beneficial, the momentum is building. I anticipate a minor slowdown in activity in the fall due to the election. Still, deal-making and fundraising have been much busier this summer than the previous two years.Want to get involved in Florida Funders’ investment initiatives? Learn more about the opportunities to invest with Florida Funders.