The Quarterly Checkup
Q4 2024 Market & VC Landscape
Tuesday, 04 March 2025 I Written by Jason Robertson
Market Overview
Are we at the end of the long dark tunnel of the challenging post-COVID VC environment? Perhaps. But I feel we won’t know one way or the other until the end of 2025 and even then, it will require meaningful progress on a number of ecosystem fronts that remain very strained at this moment.
Donald J. Trump was sworn in as the 47th President of the United States on January 20th, 2025 and immediately issued a slew of executive orders, many of which are either invalid due to a lack of Presidential authority or the impacts of which are not yet known or understood. Furthermore, threats of significant 25% tariffs roil potentially effected countries and industries. It is beyond our remit to delve into these details, suffice it to say that uncertainty feels very palpable. Yet, financial markets continue at all-time highs – with unprecedented valuation metrics that aren’t even supported by ZIRP – and are pressing higher. In addition – and what many on both sides of the political spectrum view as the most egregious grift of a President ever – the launch of the Trump family’s own meme coins implies that Trump 2.0 (as many are referring to it) is bullish for cryptocurrencies and tokens.
As forecasted, the Federal Reserve cut its overnight interest rate by 25-bps to a range of 4.25-4.50% in December with two more rate cuts anticipated for 2025. Fed Chair Powell remains vocal about the strength and resiliency of the US economy and markets softened around the release of the minutes from the December meeting; however, bullishness returned mid-January as US inflation data increased in December to 2.9% from 2.7% in November and marked the fourth consecutive increase since hitting a low in September. Say what? For those of you understandably confused by the counter-intuitive outcome, buried in that inflation data is the fact that core inflation, excluding volatile food and energy considerations, declined, thus buoying markets. However, someone forgot to tell the Federal Reserve as it elected to hold rates steady at its late January meeting. As a reminder, post-election long-term bond rates have continued to rise in anticipation of increased government spending, reduced taxes, potential tariffs, and reduced regulation, all expected to lead to substantial inflation over the next 5-10 years.
Back in the venture capital world, I discussed last quarter that the lack of distributions was weighing heavily on the ecosystem. Distributions – that is liquidity received back by fund managers and paid out to LPs, their investors – is principally driven by exits and exits have been challenging for the last three years. Although exit count in 2024 was up 10% from 2023, that activity is only maintaining a pre-2021 pace. Furthermore, exit value remains depressed with few significant return-generating exits. While a reversion to the mean may not seem like a big deal on the surface, there are now >1,300 VC-backed companies with USD $500M+ valuations, ~4x the average from 2014-2020. This has ballooned into a significant challenge because of the massive value locked up in these illiquid assets. Interestingly, over 70% of exiting companies in 2024 had raised no more than a Series A. Although this thinning of the herd is healthy for the ecosystem, these smaller deals do not support the return needs of LPs.
For venture to really regain its footing, large exits will need to occur at a higher velocity. Fortunately, two things may catalyze this: first, changes at the FTC through Trump 2.0 will likely reduce barriers to acquisitions; and second, the post-IPO performance of companies that went public in 2024 is strong, helping to accelerate the path to IPO for others waiting in 2025. That said, I still believe that it will take until the back half of 2025 to really see progress on this front assuming all else remains equal.
In a move that worsened our Canadian dollar buying power, the Bank of Canada issued its expected 50-bps rate cut in December… and then issued another 25-bps rate cut in January due to recession risks from US trade tariffs. The Bank of Canada interest rate currently stands at 3.00%. As mentioned last quarter, most economists are modeling a 100-bps spread between US and Canadian interest rates moving forward and a sub $0.70 loonie, which means that with this latest cut, the spread is now beyond that at 1.25% and the loonie is currently at $0.69.
Exits in Q4 generated USD $37B in value across 356 events, with a notable increase driven in part by IPOs in the quarter; however, this quarter still came up short compared to Q2, which may have been impacted by hesitancy associated with the US elections. Now that the dust has settled, it will be telling to see Q1 2025 exit numbers.
While total exit count in 2024 was up only 10% compared to 2023, deal value was up almost 25% driven by exits >USD $1B in value: 21 exits above USD $1B occurred in 2024 totalling USD $62B juxtaposed against 16 exits in 2023 and total deal value of USD $46B. During the last couple of years, the largest exits have been concentrated in IT and healthcare and were catalyzed by AI. For example, the public debuts of Tempus AI, Astera Labs, and Pony.ai in 2024 were the second-, fourth-, and sixth-largest exits by size, respectively, during the year.
VC Ecosystem Overview
Full year 2024 deal count was 15,260, greater than 2023’s 14,712 and the third highest in the last decade, second only to the pandemic highs of 2021 and 2022. Deal value was up more substantially at $209B compared to $162B in 2023, a 30% increase. This too is the third largest total deal value in a decade. Positive progress continues for key venture ecosystem metrics in Q4, notably notching a yearly high for early-stage deal counts although late-stage deal volume was more modest. Importantly though, 2024’s deal value has been primarily driven by a small number of outliers and Q4 was no exception. Over 43% of Q4’s $75B deal value can be attributed to five deals: Waymo, Databricks, OpenAI, xAI, and Anthropic. This also continues to highlight venture’s recovery dependence on AI. Furthermore, almost 55% of Q4’s deal value was driven by 15 companies raising more than $500M denoting venture’s reliance on a concentrated few given almost 4,000 deals were completed in the quarter. I expect we’ll see a continued, albeit slow, trend upward in 2025 unless disrupted by some exogenous shock.
Again, we continue to see startups going longer between financings as the median time between rounds extends to new highs not seen in a decade. As well, startups are staying private or independent for longer as they wait for a more favourable dealmaking environment. This has caused private company inventory to expand further to >58,500, a record high.
As noted last quarter, the lack of LP distributions continues to disrupt financing models thereby preventing LPs from committing to new funds. This trend is illustrated by the VC 12-month distribution yield as a percentage of net asset value (NAV) for funds aged five to 10 years, which ticked up slightly to 6.5% in Q4. This is likely due to the aforementioned IPOs; however, it remains well below the 10-year average of 17.1%. Furthermore, and as expected, fund count finished the year at the lowest number in a decade although capital raised exceeded pre-pandemic averages.
Achieving $76.1B worth of commitments for 508 funds, 2024 did not exceed 2023. Established managers represented ~80% of total capital raised, the greatest imbalance in a decade. Perhaps starker is the fact that 20 firms secured 60% of 2024’s capital commitments as LPs look to restrict deployment in platforms that have historically performed well. Unfortunately, this implies significant mortality for emerging managers, especially the >1,000 funds established during the pandemic, who are facing even greater hurdles due to hesitant LPs. For the first time in at least a decade, established funds outnumber emerging managers. As seen in Q3, emerging funds raised only $5.2B in Q4.
VCs have consequently slowed their deployment pace to extend existing funds while trying to improve fund performance metrics including DPI before raising a subsequent fund. As such, many VCs are investing more resources (time and money) in existing portfolio companies and helping them weather the difficult financing environment. Thus, deals are taking longer to close, more due diligence is being undertaken, and hurdles have increased to deploy capital. Although record-high VC dry powder persisted in Q4, the curve is seemingly beginning to bend downward and I would expect this trend to continue in 2025 as funds committed in 2021/22 are nearing the end of their deployment periods and need to be put to work.
VC Digital Health Overview
US digital health funding in Q4 2024 declined again for the third straight quarter from Q3’s $2.4B to $1.8B (down ~25%) across 118 deals (up slightly from 110 in Q3), with an average deal size of $15.3M (down significantly from Q3’s >$20M but not surprising if deal value was also down 25% across a similar number of deals). Unfortunately, everything was slightly “less good” in 2024 compared to 2023: average cheque sizes dipped slightly to $20.4M; total deal value was $10.1B; and total deals completed was 497.
While this may be disappointing, Rock Health suggests this may be indicative of investors’ focus on early-stage opportunities, helping to refill the funnel for future years. In support of this, labeled deals increased in 2024 from 57% of rounds to 63%, and 86% of these were for Seed, Series A, and Series B financings. It is likely that investors are focused on younger companies unencumbered by the valuation anchors of the 2020-2022 blitz.
Similar to venture as a whole, established stalwarts drove healthcare innovation dealmaking with mega funds Andreessen Horowitz and General Catalyst leading the charge in digital health by transaction count. Funding continued to concentrate in popular value propositions including nonclinical workflow, mental health, and obesity care.
Later-stage funding rounds were completed at smaller deal sizes with the median deal size for Series C and D financings hitting $50M and $55M respectively – down significantly from the 2021 highs of $73M and $105M. Relatedly, mega deals (17 completed) only accounted for 21% of 2024’s overall funding – a >30% decline from 2023. These rounds also contributed to 2024’s underwhelming total deal value.
Unfortunately, Q4 also continued the decline in M&A activity ending 2024 with a decade low 118 deals. As with venture as a whole, later-stage digital health startups with valuation pressures or failed fundraising rounds may fold or seek acquisitions in what is hoped to be a more favourable environment in 2025.
Unsurprisingly, the digital health sector also demonstrated the same favouritism to AI with AI-enabled startups commanding 37% of 2024’s funding across 191 deals. That said, consolidation may have begun, especially amongst companies developing foundation models due to the expense to build and maintain; however, these models are critical for healthcare AI as they will underpin entire ecosystems of downstream AI apps. Companies building upon foundation models are creating enterprise-capable tech stacks; however, this application layer also suffers from concentration with incumbents such as Cerner and Epic, the healthcare arms of big tech such as Microsoft and Alphabet, and well-funded digital health companies like Commure and Abridge, dominating. Nimble startups will have a role to play but they will need to strategize carefully on their positioning, address specialized use cases, and work with smaller customers.
Canadian VC Overview
In Canada, VC investment activity for Q3 2024 jumped again to $2.65B, up 6% from $2.4B in Q2, but across 130 deals (down 17% from Q2 and 7% from Q1) as 1 megadeal – Clio, the largest round ever in Canadian history – accounted for $1.25B of that. Average deal value increased another 17% in Q3 vs Q2 to $15.2M; however, stripping out Clio, that number drops to $11M, in-line with Q1. Moreover, 8 mega-deals ($50M+) in Q3 accounted for $1.9B, so accounting for those, that number looks bleak with 122 deals in Q3 at an average deal size of $6.1M, almost half of Q1.
As noted in Q2, Alberta came out swinging (anecdotal feedback from peers remains bullish on Alberta deal flow and Nimbus has now joined the Venture Capital Association of Alberta); however, after generating ~$300M of deal value in Q2, Q3 saw a reversion to Q1 numbers with $95M raised although BC and Alberta remain neck-and-neck for deals YTD.
Seperating the data out by investment stage and sector provides further context – albeit not still disconcerting but perhaps with a silver-lining. Pre-seed activity remains depressed in Q3 but showed some acceleration with 33 deals and $29M. Average deal size also ticked up to $0.88M in Q3, but still down a third from the five-year average of $1.35M. Seed deal volume remains slowed further from the last few quarters at 37 deals (vs 53 in Q2 and 51 in Q1) whereas average deal size increased dramatically to $3.5M from $2.6M in Q2 and $2.4M in Q1, further supporting the narrative of a flight-to-quality with more money invested in fewer ventures.
Following the theme, 2024’s top funded value propositions also witnessed increased concentration as the top six value propositions represented 85% of total funding – up nearly 10% over the last few years. While many of these have remained at the top over the past five years, it is interesting to observe the steep increase in funding for clinical workflow and consumer health information. Again, we believe that AI is unlocking transformational solutions to embedded problems in these areas that have been… less tractable historically. The six highest-funded clinical indications also experienced concentration – albeit to a lesser degree – totaling 48% of sector funding versus 28% in 2023.
Canadian VC Overview
In Canada, VC investment activity for Q4 2024 plummeted 50% to $1.34B compared to $2.65B in Q3 and $2.4B in Q2 across 124 deals (down slightly from Q3 and Q2). To add insult to injury, 4 mega deals (>$50M) accounted for $701M, or 50%, of Q4’s deal activity. However, before running for the exits, remember that 1 mega deal – Clio, the largest round ever in Canadian history – accounted for $1.25B of Q3’s value, almost the entire difference between Q3 and Q4’s deal value. Furthermore, Q4 has often been one of the weakest deal quarters, especially in recent years. Together, Canadian full year total deal value came in at $7.9B across 592 deals. While 2024 total deal value increased versus 2023’s $7.1B, expanding the aperture shows that the low deal counts and – accounting for the mega deals – adjusted deal value is more in-line with pre-pandemic Canadian venture.
Average deal value for 2024 settled at $13.3M – up from $10M in 2023 – and up from the five-year average of $12.4M. On one hand, this may underestimate the significance of 2024’s performance strength, whereas on the other, adjusting for mega deals like Clio and expanding pre-pandemic may suggest that Canada has made little progress in the last decade.
Despite Alberta’s performance in Q2, BC crossed the finish line ahead and 2024 reverted to the mean with Ontario, Quebec, and BC securing almost 90% of all venture dollars and over 75% of deals. However, this masks that Alberta was only slightly behind BC with 84 deals completed compared to BC’s 88. Furthermore, though BC accounted for almost 4x the deal value as Alberta, as noted above, outlier mega deals like Clio were largely responsible for this disparity. In short, Alberta is gaining steam and is certainly a geography to keep an eye on in 2025.
Seperating the data out by investment stage and sector provides further context and continues to support my serious concern with meaningful early-stage funding gaps. Pre-seed activity continued to decline in Q4 continuing a trend since the beginning of 2023 with only 19 deals and $21M of deal value. As seen in the US, more capital is concentrating in fewer deals and thus is unsurprising that average deal size ticked up to $1.12M in Q4, up almost 2x from Q3’s $0.66M. Average deal size for the year finished at $0.86M, 36% below the five-year average of $1.34M. Seed deal volume remains more or less down over the last few quarters at 46 deals (vs 41 in Q3 and 62 in Q2) with average deal more or less flat at $2.49M.
Unfortunately, and unlike prior quarters, Series A and B activity also plummted with only 26 deals recorded with a total value of $328M. This is the lowest quarterly deal count and the third worst in deal value that I have data for since before 2018. Average deal size was $12.63M, down significantly from Q2’s $23.5M; however, this is still signficiantly elevated since before the pandemic continuing the theme of concentration of more money into fewer deals. While late-stage and growth financings seem robust, pre-seed/seed and early-stages are hurting with no end in sight nor clear narrative for how this will revert in the future. I remain deeply concerned over the health of the Canadian VC ecosystem as deal counts should be highest at the earliest stages of investment (top-of-funnel) in recognition of attrition at further stages of investment. The continued risk-off behaviour of investors shifting to later funding rounds will hinder the replenishment of new ventures and cause signficant consternation for downstream investors in future years.