Silicon Valley Bank Issues its Annual Outlook on the Innovation Economy The SVB State of the Markets report examines the factors shaping the innovation economy including trends in venture fundraising, investments, public markets and exits.

Drawing from its proprietary data, deep relationships with entrepreneurs and investors, and more than 40 years of experience, Silicon Valley Bank - a division of First Citizens Bank - released its State of the Markets report for H2 2023.

This biannual report dives into the current state of the innovation economy and in it, the authors provide a unique perspective on macroeconomic, fundraising and investment developments.

Key takeaways from the report include:

• After 18 months of decline, VC investment levels show signs of stabilization in line with 2019-2020 levels, with $182B in VC investment in the trailing 12 months.
• Record PE/VC dry powder – more than $1 trillion – is a bright spot in the innovation economy, yet with limited LP pressure to invest, capital deployment may remain slow.
• A survey of 80 VCs revealed they are overwhelmingly playing an active role in how founders manage their banking decisions. Ninety-five percent said they're taking a hands-on role in their portfolio companies' banking decisions.

Top players in the private markets, SVB included, predicted material drops in fundraising, investment and exits. While that has mostly played out, for pockets of the innovation economy a floor is beginning to form. Valuations and investment appear to be stabilizing, company profitability is modestly improving, and generally companies have ample runway. This momentum could reopen the IPO window, bring confidence and stability to late-stage investment and valuations, and help balance limited partner (LP) allocations to public and private market.

Cautious optimism around investments

Historically, 12-18 months into a down cycle, VC investment reaches a floor. While US VC investment levels may still fall, they are showing signs of stabilizing.

Looking ahead, there are several key indicators that give pause, such as an inverted yield curve, falling corporate profits, muted LP distributions, increased down rounds and declining revenue growth among startups. Despite this adversity, SVB continues to believe in the resilience of the innovation economy.

Dwindling runway across the industry

In the next 12 months, only 46% of US VC-backed tech companies must raise — which is lower than historical pre-pandemic levels. Yet median runway continues to fall for all stages and sectors. Founders face depleting runway and few options to replenish it.

Runway has fallen, yet not as quickly as VC investment. Companies are managing runway by reducing burn and focusing on profitability and efficiency.

VCs state the growing importance of treasury management

When asked how founders should rank treasury management among other business challenges, VCs gave it near the same importance as navigating macro headwinds or managing regulatory risk – important but below more core business needs like product market fit.

Founders who might have put banking on the backburner in the past, must now actively manage their cash allocations as they do other business priorities.