In Q4 2022, US-based venture capital funds experienced a sharp decline with an IRR of -16.8%, marking the asset class’s worst quarterly return in a decade. The downturn was attributed to the need for venture capital funds to devalue their late-stage portfolio companies, aligning them with comparable public firms affected by rising interest rates.
While the industry anticipates continued challenges, experts predict a relatively modest downturn in 2023, with the possibility of low single-digit declines. The impact of down rounds and company failures is mitigated by early adjustments in valuations, with companies being marked down earlier in anticipation of such events.
Despite the overall downtrend, there are signs of potential recovery, notably through new funding rounds at higher valuations, particularly for generative AI companies. However, the true performance of VC funds in 2023 will become clear next year, as Q4 audits, reflecting revised asset values, will reveal the actual impact on venture capital investments.
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