By Don Butler
At Thomvest Ventures, we’ve been investing in venture for three decades, and yet today we face what feels like a novel turn of events: a potential recession and increasing exit uncertainty due to government-induced volatility.
For an ecosystem that has long awaited the return of robust exit volumes, the uncertainty in the markets couldn’t come at a worse time.
Record capital, weak exits
We are at a unique point in time given the record amount of venture capital put to work in companies since 2020. We have an overabundance of startups that have raised significant amounts of capital. After the IPO boom of 2021, we’ve seen anemic IPO volumes and weak M&A volumes.
The exit markets in the past few years have shown a flight to quality by both IPO and M&A buyers. Where the threshold to go public might have been $150 million to $200 million of annual recurring revenue in years gone by, that has risen to about $400 million today.
At the same time, the combination of high interest rates and uncertainty regarding a possible recession in the past few years led to weak M&A volumes by private equity and corporate buyers, with buyers placing primacy on the efficiency of the businesses being acquired.
The importance of exits
The venture capital ecosystem needs successful exits to thrive. The limited partners that invest in venture funds look to exits as vindication of both the asset class itself and the specific fund managers they have selected.
Many of us were optimistic that this would be the year we would see a return in IPO volumes and a resurgence in M&A under the new, more pro-business administration. While the outlook for regulatory approval of acquisitions has improved, the tariffs have introduced a new source of concern; we have replaced the excessive regulatory scrutiny of the past administration with uncertainty driven by regulatory volatility.
A glimmer of optimism?
One potential silver lining is that the pressures of a recession and tariff-induced inflation could eventually force a lowering of interest rates in the coming quarters. While this outcome is not guaranteed, such a move might help stabilize the market and mitigate some of the current challenges. A lowering of interest rates would not only make it easier for private equity firms to use debt for company acquisitions, but could also kickstart areas of the economy — such as the housing market — that have stalled.
As the VC ecosystem learns to adapt to this new type of volatility, the return of healthy exit volumes looks likely to remain an elusive goal for all but the very best of companies in this environment.
Don Butler is a managing director at Thomvest Ventures, a $750 million evergreen VC fund founded by Peter Thomson (Thomson Reuters). His investments are focused on financial technology and marketing technology companies that leverage emerging and persistent data sources to better acquire and serve customers.
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Illustration: Dom Guzman
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