VCs don shades even as tech storm clouds gather

UVC rays. The triumph of hope over experience is on full display in Los Angeles, where some of the venture industry’s biggest titans have gathered for an annual confab. Entrepreneurs, their backers, and their backers’ backers are discussing sunny days, unfazed by a regulatory probe into the golden child of artificial intelligence, OpenAI. But less than a year after a series of bank collapses that directly impacted the technology sector, nascent companies are struggling to find ways to fund themselves. Efforts by big tech firms to bolster the industry are making matters worse.

As is typical of the Hollywood-based event hosted by Upfront Ventures, celebrities such as musicians Lady Gaga and Katy Perry took the stage to discuss their launch of consumer brands. Much of the programming at the conference, now in its 11th year, was a throwback. Panels dedicated to cryptocurrency took top billing. The modest amount of humility, like a discussion on the “VC Winter," was tempered by comments like Index Ventures investor Shardul Shah’s claim that “the sun is shining outside of AI."

The problems stem from a funding snap. A year ago, a main backer to the industry, Silicon Valley Bank, went out of business. In the 10 years prior to 2022, investment in private U.S. startups increased eightfold. In 2023, VC funds in the U.S. drummed up a meager $67 billion from their backers, a six-year low, according to data provider PitchBook. An anemic market for initial public offerings has made it harder for backers to exit investments, and dealmaking has been feeble. Last year just 1,738 venture-backed startups were acquired globally, the lowest number since 2015, according to Crunchbase.

Companies that have promised to reshape online interactions through AI have put a little glow over the business. Last year, Microsoft made an investment in OpenAI, which validated the industry and breathed life into the prospects for venture firms that are building similar companies. And yet the U.S. Securities and Exchange Commission’s inquiry into OpenAI, reported by the Wall Street Journal, suggests a sophisticated partner doesn’t necessarily stop a company from experiencing growing pains.

Worse, hype from giants like Microsoft is lifting valuations such that the best companies could become out of reach for smaller investment players who are scrambling to keep their own funds afloat. Entrepreneurs have plenty of optimism, but donning sunnies doesn’t make the weather outside any better.