Many startups are hoping that the gradual opening of an IPO window and the prospect of interest rate cuts later this year will finally encourage VCs to be less stingy with their capital.

But it’s unlikely that startups’ fundraising slog will become much easier soon, mostly because of venture capitalists’ own capital-gathering challenges.

In Q1, U.S. VC funds raised only $9.3 billion, according to PitchBook data. At this pace, VC fundraising will end 2024 at just above $37 billion, the lowest capital raised since 2013 and a 54% decline from last year.

Just like startups, VCs are struggling to attract new capital from their backers, known as limited partners, such as endowments, foundations and pension funds. The drastic decline in IPO and M&A activity over the last couple of years meant that LPs had meager cash distributions from their investments in VC funds.

“We’re coming out of a 2020 to 2021 period when [LPs] had the fear of missing out and were rushing into venture,” said Kirsten Morin, co-head of venture capital at HighVista Strategies, an asset manager that invests in venture funds. “Now they are licking their wounds and saying, ‘Oh, no, I invested at the top of the market. It will be a while before I see any distributions.’”

Other limited partners say that they will be extremely cautious with their investments until startup IPOs pick up considerably. Reddit‘s and Astera Labs’s successful offerings aren’t nearly enough to get LPs excited about venture again.

Brand-name firms will continue to raise funds, but they may have less capital to invest in startups than they did in the past. Take IVP, for instance. The 43-year-old venture firm closed a $1.6 billion fund last month, a more than 11% decrease from the $1.8 billion vehicle it raised in 2021.  

But attracting new capital from LPs won’t be as easy for smaller and newer venture firms. “I think a lot of people may fall out of the business over the next few years,” said Chris Douvos, a managing director at Ahoy Capital, which invests in funds and startups. 

While this is not great news for existing startups, it’s not all doom and gloom, either. PitchBook estimates that dry powder, the amount of capital VCs still have to invest from previous funds, remains high.

However, that amount will dwindle unless LPs open up their coffers again.  

“One low fundraising quarter is not going to make or break the future of VC,” said Kyle Stanford, lead venture capital analyst at PitchBook. “But if this continues, it will be a hit on deal making.”