Just how backed up are the venture capital markets today? Imagine a traffic jam in which every car is worth a billion dollars of illiquid capital. Now imagine that there are 1,000 cars in that traffic jam. Finally, realize that the 1,000 billion-dollar cars in front of you are only part of the issue.
That’s what a recent data analysis indicates is happening today in one critical venture capital market. The value of the most mature startups in the United States that need to find an exit neared the $1 trillion mark through Q3 2023, according to a recent PitchBook analysis.
The figure underscores how weak the exit climate has been over the last two years and highlights the sheer mass of illiquid equity investments made into startups that call the United States home.
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The U.S.’ exit backlog is merely a part of the larger whole. PitchBook defines the “venture growth” fundraising bracket as “any financing that is Series E or later or any VC financing of a company that is at least 7 years old and has raised at least six VC rounds.”
In the U.S., that group accounts for just under $1,000 billion in unexited startup value, not counting the investments in the final quarter of 2023. If we were to include startups from the rest of the world, that number would be even larger, not to mention how much more we’d be looking at if we include slightly younger startups in the equation.
Caveats abound. Of course, not every startup that raised a “venture growth” round is still worth what it once was, and many unicorns that have held off on formally repricing themselves after 2021 could fit that bill. Moreover, since we are considering only the U.S. today, we should remember that we are not seeing the full, global picture. Still, the United States’ venture capital market is worth about half of the global whole, so when we discuss Yankee territory, we’re nevertheless talking about a huge portion of the startup market.
This morning, let’s dig into where we can find the most locked value in startup land, and just how long it might take for venture-backed tech companies that have already reached the end of their private tenures to go public.
We’re going to need a bigger boat
According to PitchBook, U.S.-based, venture-growth-stage startups in the SaaS, AI, ML and fintech sectors have raised $256.6 billion through most of 2023, altogether making up a total post-money valuation of $981.5 billion. That breaks down to $4 of startup value per invested dollar. (Note that some of the startup valuations that we’ve used in this math are likely going to decline after some down-rounds, so the ratio is probably a bit worse than what we have here.)
PitchBook also provided per-category figures (data from Q1 to Q3 2023):
- SaaS: $532.4 billion
- AI/ML: $240.7 billion
- Fintech: $208.4 billion
That’s a ton of locked-up venture dollars.
This backlog matters because venture capital investors are judged across a number of metrics (TVPI, IRR, MOIC, etc.), but the one that matters the most is distribution to paid-in capital (DPI). This metric measures capital distributed from a fund to its backers, divided by how much money those backers put into the fund. It’s the “rubber meets the road” metric for venture returns. So, thanks to the massive amount of illiquid investments that we see above in our short bulleted list, a lot of venture firms are stuck waiting to distribute the gains from their investments in successful companies.
Venture investors care a lot about this backlog. In turn, so do their LPs. Happier LPs means more interest in venture capital investments, which can bolster the entire startup industry. Unhappy LPs, on the other hand — perhaps those who have been promised massive paper gains but have seen little in the way of real cash distributions — will presumably be less enthused about investing in venture capital again.
That’s why startup exits matter. And they are way, way behind schedule.
How far behind are we, then?
Remember the absolutely bonkers amount of IPOs we had back in 2021? Well, according to PitchBook, that year saw $157.6 billion of venture growth-stage SaaS companies pulling off an exit. So, considering the $532.4 billion worth of venture-stage SaaS companies that may be ready to IPO today, it would take more than three times the exit activity we saw in 2021 to clear only the SaaS backlog, provided no new super-late-stage SaaS companies are added to the list.
However, IPO activity has been happening at a fraction of a fraction of 2021’s velocity. In 2023, for example, we saw only $28.2 billion worth of IPOs, according to PitchBook. SaaS companies accounted for about $12.6 billion of that figure.
Not much, in other words.
It is not clear to me what could unlock the IPO market to a point where a material portion of late-stage startup equity in the United States could find a way out. Globally, the backlog is even longer, and we haven’t even included the merely late-stage startups that have to exit.
This is why the 2024 IPO market matters so much. There’s a continent-sized glacier of money frozen in startups today, and with the pressure ticking higher every day for it to melt and become liquid cash, something is bound to break. I just hope it doesn’t break anything permanently.