The venture capital industry entered a new regime when the U.S. Federal Reserve began raising interest rates in March 2022. The zero-interest-rate policy (ZIRP) that had governed markets since the 2008 financial crisis ended, and with it the assumptions — cheap capital, abundant liquidity, a preference for growth over profitability — that had defined a generation of startup investing. Three years later, the industry is still adjusting to a world in which money is not free, and the adjustment has created a landscape of extreme contrast.
Dry Powder on Ice
Venture firms globally are sitting on an estimated $300 billion or more in undeployed capital — “dry powder” — committed by limited partners (LPs) but not yet invested. This is a record. LPs, the pension funds, endowments, and family offices that invest in venture funds, committed heavily in the 2020-2022 boom and are now over-allocated. Many are reluctant to commit more until distributions — the returns that flow back to them from successful exits — pick up.
Exits, meanwhile, have been slow. The IPO market for technology companies, which boomed in 2020 and 2021, cooled dramatically in 2022 and 2023. A slight recovery in 2024 did not return volumes to the boom-era peak. Mergers and acquisitions, long the main exit route for venture-backed companies, have been dampened by regulatory scrutiny of large tech deals. The result is a capital logjam: LPs want returns, funds want exits, and many portfolio companies are stuck waiting for a liquidity event in a frozen market.
Down Rounds and the Great Reset
For startups, the new rate regime translated into a painful correction. Companies that raised at astronomical valuations in 2021 — when venture capitalists competed for deals and growth was prized above all — found that subsequent rounds came at steep discounts. Down rounds, in which a company raises money at a lower valuation than its previous round, were rare during ZIRP and became common after.
Data from PitchBook and others show that the share of venture rounds that were down rounds roughly doubled from 2021 levels, peaking at around 20% of deals in some quarters. This was not primarily a collapse in fundamental value; it was a repricing of the cost of capital. A company growing at 30% annually was worth much more when the risk-free rate was near zero than when it was above 4%.
Companies that had stretched their runways with generous 2021-era rounds weathered the storm. Companies that had raised at the peak with a year or two of runway faced stark choices: cut costs deeply, raise at a down round, or shut down. Layoffs across the startup sector, from Stripe and Shopify to hundreds of smaller firms, were part of this adjustment.
The AI Exception
The glaring paradox of post-ZIRP venture is that one category has been immune to the downdraft: artificial intelligence. In 2024, AI companies raised roughly one-third of all venture capital in the United States, a concentration with no recent precedent. Of the roughly $160-190 billion in U.S. venture funding in 2024, an estimated $50-70 billion went to AI-focused companies, including the massive rounds raised by OpenAI, Anthropic, xAI, Scale AI, and others. Globally, AI captured an even larger share.
These AI rounds are capital-intensive in a way that software investing never was. Training frontier models costs hundreds of millions or billions of dollars. Inference at scale requires enormous infrastructure. The economics resemble infrastructure investment more than SaaS, and the venture model — which expects 10x returns from outlier winners, not steady cash flows — may be a poor fit. Whether the returns will justify the capital deployed is the most consequential question in technology finance today.
The Sequoia Cycle
Leading firms have adapted their strategies. Sequoia Capital, historically the standard-bearer of seed-stage investing, raised billions of dollars and made large, late-stage investments in companies including Stripe and ByteDance, effectively extending its model into growth equity. Andreessen Horowitz (a16z) doubled down on deep-tech and AI with a strategy of proprietary deal flow, significant reserves for follow-on investment, and a large policy and communications operation.
Meanwhile, a crop of micro-funds and solo general partners, often raising under $50 million, has carved out niches at the earliest stages. The industry has bifurcated: a few giants deploy multibillion-dollar funds while many small, focused funds operate beneath them.
What LPs Are Thinking
Institutional investors are recalibrating their relationships with venture capital. After a decade in which venture returns outperformed public markets by a wide margin — and the dispersion among top and bottom firms was enormous — LPs are becoming more selective. Brand-name firms with track records can still raise funds, sometimes oversubscribed. Lesser-known firms, especially those raising first or second funds, face a harder market.
The LP calculus now includes questions that were secondary during ZIRP: distributions to paid-in capital (DPI), the ratio of returned capital to invested capital, and cash-on-cash multiples. Funds that deployed aggressively in 2020-2021 but have not returned capital are under scrutiny.
The Canadian Corner
Canada’s venture market, which has grown substantially from a small base in the past decade, reflects many of the same trends. Toronto and Montreal have concentrated AI activity, with the Vector Institute and Mila as talent generators. Canadian venture fundraising reached record levels in 2022-2023, buoyed by government participation, but the exit market remains shallow relative to the U.S. The path to liquidity — typically an acquisition by a U.S. company or a public listing on the TSX or NASDAQ — is narrower.
The IPO Window and the Exit Drought
The venture capital model depends on exits, and the exit market has been sluggish. After a boom in 2020-2021 — which saw high-profile listings including Airbnb, DoorDash, and Snowflake — the technology IPO market contracted sharply in 2022 and 2023. Some daylight appeared in 2024 with Reddit, Rubrik, and a handful of others, but the pipeline of unicorns seeking liquidity dwarfed the volume. The result is a growing backlog of private companies worth billions, many of which were valued at the 2021 peak and cannot go public without taking a haircut that their later investors and employees would resist. The impasse — companies need liquidity, markets need sensible prices — is one of the defining tensions of the current cycle.
Secondary Transactions and the Private Liquidity Market
In the absence of IPOs, secondary markets have grown. Platforms like Forge and EquityZen enable employees, early investors, and funds to trade private-company shares. High-profile secondary rounds — where new investors buy shares from existing holders — have provided partial liquidity to early stakeholders in Stripe, SpaceX, and other giants. These markets are opaque, illiquid, and often involve discounts relative to last-round valuations, but they fill a real gap. The maturation of secondary trading is one of the more significant structural changes in private markets this decade.
Geographic Concentration and Its Discontents
Venture capital remains geographically concentrated. The San Francisco Bay Area accounts for a disproportionate share of U.S. venture dollars — somewhere between 30 and 40 percent in many years — and similar concentrations exist in China, India, and Europe. This concentration has been challenged by remote-first investing, and by the growth of ecosystems in New York, Toronto, Berlin, and Bangalore, but the gravitational pull of the Bay Area remains strong, particularly for AI where talent, capital, and company-building expertise are inseparable. For Canadian founders, the decision to raise capital locally or go to the U.S. is a recurring strategic choice, and the answer is often both.
The LP Conundrum
Institutional investors — pension funds, endowments, insurers — are the ultimate source of venture capital, and they are recalibrating. After a decade of record returns from venture, the distributions (actual cash returned) have been poor for recent vintages, and many LPs now ask harder questions about fees, carry, and alignment of interests. Allocations peaked in 2022 and have modestly declined, though top-tier firms remain oversubscribed. The LP drought is most acute for emerging managers — new funds raised by first-time partners — whose ability to access capital has tightened meaningfully. The result is a funnel that favours incumbents and makes it harder for new firms to launch.
The Talent and Compensation Reset
The end of easy money reshaped startup compensation. During the boom, companies competed for talent with generous equity grants, high salaries, and lavish perks. When valuations fell and funding tightened, compensation was recalibrated. Some companies repriced options after down rounds to keep employees from holding “underwater” grants. Others froze hiring or reduced headcount. For founders, raising capital became harder and the terms less generous, which increased pressure to reach profitability earlier. The adjustment was painful but rational: a startup that spends within its means survives downturns, while one that depends on the next round does not. The discipline imposed by the post-ZIRP environment, uncomfortable as it is, produces more durable companies.
Conclusion
Venture capital is in a period of adjustment, not crisis. The industry has capital, talent, and a broad pipeline of companies. But the assumptions of the ZIRP era — that growth always compounds, that valuations always rise, and that selling to the next fund at a higher price is a durable strategy — have been tested. The discipline of a positive cost of capital is ultimately healthy, even if it is painful in the transition. The AI mania raises a separate question: whether the concentration of capital in a single category is a sign of genuine value creation or another instance of market myopia. The answer, as always, will be visible only in retrospect — in the exits, or their absence, that define the returns of the 2020s vintage.
