With few IPOs and exits, firms have been struggling to send money back to investors and raise new capital from them — but experts see a turnaround coming
If you focus on some of the top-line, headline-grabbing numbers, this would seem to be a boom time for venture capital . The industry collectively invested more money in startups last year than in any other year except 2021.
And venture investors have been putting gobsmacking sums into particular companies, including what ended up being a record $110 billion earlier this year for San Francisco’s OpenAI. But if you dig a little below the surface, the venture industry’s foundational business model appears to be under stress, if not breaking down. Venture experts who spoke with The Examiner said they don’t think the industry is failing. But they said they do think it’s changing significantly in numerous ways — and that some firms and startups are going to be left behind by its transformation. “I would like to think about as undergoing some metamorphosis that reflects the changing times that we’re in,” said Emmanuel Yimfor, a finance professor at Columbia Business School who focuses on the industry. “The people who are going to make it” through that transition “are the people who are able to pivot to where the money is,” he said. Ideally, the venture industry — which is concentrated in San Francisco and Silicon Valley — works like a kind of almost self-perpetuating flywheel. Venture firms raise capital for new funds from the pension firms, family offices and institutional investors that become the funds’ limited partners. The firms take that money and invest it in startups. Most of those startups fail, but a few of them generate big returns by going public at prices much higher than the firms paid for them. The firms sell off their stakes in the now-public startups and distribute to their limited partners the partners’ share of the proceeds. The limited partners then turn around and invest much or all of those proceeds into the firms’ next funds, which the firms use to invest in the next generation of startups.After a record year in 2021, the public-offering market fell off a cliff and still hasn’t recovered. From 2022 to 2025, just 308 venture-backed companies went public, compared to 316 in 2021 alone. Combined, the companies that hit Wall Street over the last four years had an initial market capitalization of $236 billion; the ones that went public in 2021 were together worth $660.6 billion when they debuted. But it’s not just IPOs — acquisitions, whether by other companies or by private-equity firms, also dropped off after 2021 and are still recovering. Last year, there were 1,410 successful startup exits among U.S. venture-backed companies, down from 2,060 in 2021, according to PitchBook. The combined value of last year’s exits was $297.8 billion; in 2021, that tally was $864.2 billion. Partly as a result, the number of companies waiting to go public or find some other exit has ballooned. There are now 859 U.S. unicorns — venture-backed companies valued at $1 billion or more that remain private and independent — up from 292 in 2020, according to PitchBook. Collectively, those billion-dollar U.S. startups are nominally now worth $4.3 trillion — up from $853 billion in 2020. That represents about two-thirds of the value of all U.S. startups combined, according to Kyle Stanford, director of U.S. venture capital at PitchBook. The jump in the number of unicorns was largely a result of the huge influx in capital that limited partners put into the U.S. venture industry in 2021 and 2022 — $392.6 billion across those two years — according to Stanford. But their value can’t be realized by venture firms or their limited partners unless those companies somehow find ways to exit. And much of that value is likely only on paper, because many of those startups valuations were set during the height of the funding boom and many of those companies are not growing at the rate they were then, Stanford said. For years, many of those companies have been in a kind of limbo, unable to go public or raise new money without at least accepting a significant cut in their valuations. In the past, that might not have been an issue, because the industry had ample capital to fund startups long past the time they would normally go public. But to a large extent, that money has dried up, at least for older startups. About 41% of the current tally of U.S. unicorns haven’t raised any new venture funding since 2022 — a long time for typically money-losing startups.In recent years, there’s been big growth in secondary markets, which allow startup employees, executives and early investors to sell their shares to other investors before the company goes public. Those markets have served as a kind of relief valve, allowing venture firms to give some capital back to their limited partners. But the secondary markets are relatively shallow for shares in companies other than the biggest, best known and most desirable. On one of those markets — Hiive — just 20 companies account for 86% of the shares bought and sold, according to PitchBook. “It’s very, very concentrated,” Stanford said. “So, even though secondaries have gotten a lot of airtime ... they’re not what the market needs.” The downturn in exits — and the inability of secondary sales to make up for them — has meant that far more money has been flowing into the industry from limited partners than firms have been sending out to those investors in returns. From the beginning of 2022 to the middle of last year, limited partners have sent $169 billion more to venture firms than they have received back in distributions, according to PitchBook. That outflow of cash — and the lack of returns to reinvest — has seemed to weigh on such investors’ willingness to commit to new venture funds. The number of newly closed funds and the total amount of fundraising by venture firms have both fallen for three straight years, dropping from a record $223.5 billion across 1,793 funds in 2022 to $66.5 billion across 625 funds in 2025. That’s meant that fewer firms have money to invest in the next round of startups. It has also meant that increasingly, the money flowing to startups is coming from nontraditional investors, such as big tech corporations, rather than from venture firms. Last year, $196.7 billion, or 58% of the total amount raised by startups, came in deals involving corporate investors, according to PitchBook’s data. That amount and percentage have both increased in each of the last three years. Ex // Top Stories SF steps up efforts to designate local landmarks amid push for housing New accelerated program adopted to preserve historic and cultural resources in balance with updated zoning rules Why mega-IPOs from OpenAI, SpaceX could hamper broader IPO market The sheer size of the potential offerings from major firms is likely to suck the air out of the room for other public offerings, market watchers say SF Symphony season to center Bay Area stars SF Symphony will once again feature a suite of guest conductors as it searches for a music director Although PitchBook doesn’t break out what portion of that $196.7 billion actually came from corporate investors, they have played outsized roles in many of the biggest funding rounds of late. OpenAI’s $110 billion round, for example, came from Amazon, Nvidia and SoftBank. It’s clear from such data that the venture industry is not functioning the way it has in the past, said Kyle Stanford, director of U.S. venture-capital research at PitchBook.But that’s not the only way to look at the industry, he and other industry experts said. It’s better to think of the venture business as being in a state of flux — one it’s run into before — than breaking down completely, they said. The industry has always had a cyclical nature to it, said Josh Lerner, a professor at Harvard Business School who focuses on venture capital. It saw downturns in the mid-1970s, the early 1990s, in the early 2000s after the dot-com bust, and in the 2010s following the Great Recession. After several of those, there were articles in the industry magazine Venture Capital Journal declaring the business was dead, he said. “Each time ... that VCJ was declaring the industry dead was exactly the best times to be investing,” Lerner said. It has often taken years for the industry to recover from downturns, and can often feel like the lean years far outnumber the good ones, he said. Indeed, the industry chronically struggles to find equilibrium, said Sean Foote, a venture capitalist and a member of the professional faculty at UC Berkeley’s Haas School of Business. Because investments can take years — even decades — to pay off, the industry can often be slow to adjust to changes in the market, Foote said.When venture firms are flush with cash, the prices they have to pay to buy stakes in startups go up, and their potential returns go down, he said. When capital is hard to come by, prices go down, but fewer firms have the capital to invest.That’s not to say that the struggle the industry is in won’t have some consequences. It’s become increasingly hard for brand-new venture firms to break into the business or for recently established firms to raise new funds. Last year, just 106 venture firms raised their first funds; in 2022, that tally was 479, according to PitchBook. Firms that have raised four or fewer funds in the past raised only 236 new funds last year, down from 981 in 2022. And the number of venture investors who invested in at least one deal last year — 13,210 — was down by nearly 50% from 2021.The industry also appears to be splitting in two, the experts said — between firms managing funds in the tens of millions of dollars and making relatively small investments in early-stage startups, and much larger, brand-name venture firms such as Sequoia and Andreessen Horowitz that are raising billions of dollars of capital. The problem for the smaller firms is that the Sequoias and Andreessens of the world are investing not just in later stage companies but also early stage ones, the experts said. And their investments can often be more attractive for founders, because they have the capital to continue funding companies as they reach their next stages of development. They also tend to have much more developed networks of contacts with other investors and tech companies, the experts said. Those bigger firms can also be more attractive for limited partners, many of which find it easier to make one big investment with a single firm than multiple investments with smaller firms. The industry is “going through this transition period where we have some ... consolidation and then bifurcation,” Yimfor said. “The Sequoias of the world — they still have no trouble raising new money,” he said. “Where you have a lot of trouble is with emerging managers.” But the overall industry could be poised for a bounce-back. Past booms in the venture business have been fueled by technological upheavals and revolutions. The nascent artificial-intelligence business looks like it could be not just another one of those, but perhaps the biggest yet, the experts said. AI companies such as OpenAI are still trying to figure out what their business models are going to be and how they’ll make money, Foote said. That’s an indication the industry is still in its earliest days and has plenty of potential ahead of it, he said.“Disruption is where a lot of venture capital success comes from,” he said. In the meantime, the IPO market has already been rebounding. Three of the biggest unicorns — SpaceX, OpenAI and Anthropic — are widely expected to go public this year. While their debuts could scare off other startups from going public in 2026 because of all the attention and money they’re likely to attract, they’re likely to present a massive windfall to their investors and could eventually help open up the market to other companies. Should that happen, we’re likely to look back on the present moment in the venture industry “and say, yeah, it was a blip, not the end of the world,” said Robert Hendershott, a finance professor at Santa Clara University who focuses on startups and venture capital. If you have a tip about tech, startups or the venture industry, contact Troy Wolverton at twolverton@sfexaminer.com or via text or Signal at 515-5594.
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