The Exit Is Closed: Why Venture Capital Can’t Cash Out

Startups Stall as Exit Routes Narrow Across the VC Landscape

In the first quarter of 2025, the U.S. venture capital industry finds itself stuck in an unusual predicament: startups are plentiful, yet exits have nearly come to a halt. Companies that once eagerly planned to go public or merge with larger firms now hesitate, wary of the uncertain economic landscape. This hesitation has created a traffic jam of startups waiting for the right moment to exit, leaving investors and founders alike wondering when conditions will finally improve. As the market cautiously eyes signs of recovery, predictions emerge that the logjam might soon ease, but no one is yet certain when or how quickly this will come.

Structural Forces Behind the Liquidity Bottleneck

How We Got Here: From Peak Valuations to Exit Drought

The U.S. venture capital ecosystem has been hit by an unprecedented drought in exits during the last 4 years. In 2023, U.S. venture-backed exits returned $64B to investors, a tiny fraction of the record sums seen in 2021 (4). During Q3 and Q4 2022, quarterly exit value plunged to $8B marking them the worst quarters for VC liquidity since 2013 (5). This collapse comes from a 90% decline in exit value in 2022 versus the 2021 boom amid inflation concerns and rising interest rates. In fact, 2022’s annual exit tally of $76B was the first time since 2016 that U.S. venture exit value fell below $100B (6). 

US VC Market Activity ($B)

Source: Pitchbook Venture Monitor

A Vanishing Act: The IPO and M&A Freeze

High-Profile Holdouts, Discounted Deals, and Delayed Dreams

A telling sign of the freeze is the lack of high-profile initial public offerings (IPOs). Until very recently, there hadn’t been a notable venture-backed tech IPO in the U.S. since December 2021. U.S. startups have significantly delayed IPOs and mergers due to unfavorable market conditions and economic uncertainty, causing a severe slowdown in the venture-backed exit market. High-profile companies like Stripe and Databricks postponed IPO plans, opting for private funding or reduced valuations instead (10). Few notable IPOs occurred, such as Instacart and Klaviyo, but at much lower valuations than previously anticipated. 

M&A activity has similarly slowed, with companies hesitant to sell at reduced valuations. Notable acquisitions like Atlassian’s purchase of Loom or Check Point’s acquisition of Perimeter 81 occurred at significant discounts, highlighting the challenging exit environment (11). 

Sector by Sector: Who’s Hit the Hardest?

From Fintech to Deep Tech, Exit Challenges Ripple Across Industries

The liquidity crisis has severely impacted several sectors, notably fintech, healthtech, SaaS, and AI/deep tech. Fintech experienced a dramatic drop in exits, with many unicorns delaying IPOs and accepting lower-value acquisitions (8). Healthtech, which boomed during the pandemic, saw exit values plummet to decade lows, leading companies to settle for strategic acquisitions at reduced valuations (9). SaaS companies face a backlog of delayed IPOs and lowered acquisition multiples, prompting startups to remain private longer. In AI and deep tech, despite heavy private investment, exits remain sparse, with notable exceptions like Databricks’ acquisition of MosaicML, primarily through strategic M&A rather than IPOs (12). 

Capital Locked In, Caution Locked On

LP Distributions Dwindle and Venture Firms Pull Back

The current liquidity crunch in venture capital has significantly disrupted the flow of funds within the industry, directly impacting investors and limited partners (LPs). With exits stalled, venture capitalists are unable to return capital to their LPs, slowing new investments and creating a cycle of cautiousness throughout the market. This slowdown has led to reduced dealmaking activity, smaller rounds, and fewer active investors. 

Many venture firms have responded to these conditions by slamming the brakes on new deals and focusing on shoring up existing portfolios. Total VC investment in the U.S. fell to $170.6B in 2023 across 15,700 deals, roughly half the level of 2021 (4). Yet even with plenty of dry powder still on hand, investors have become far more cautious in deploying capital. 

Deal terms have also shifted, when financings do occur, they tend to be smaller and often inside rounds rather than aggressive new bets. One dramatic data point shows 38% fewer VC investors were active in 2023 and 2024 versus the peak during 2021, meaning a significant chunk of funds essentially sat out during that period according to Pitchbook (7).

LP Pressure and the Rise of Secondaries

A New Path to Liquidity—At a Cost

The liquidity crisis in venture capital has put significant pressure on LPs such as pension funds, endowments, and family offices as distributions from venture investments have substantially declined. With fewer exits, LPs have received minimal cash returns, increasing their demand for liquidity solutions. This situation has driven interest in secondary markets, where LPs sell stakes in venture funds or mature startups, often at discounts, to realize immediate cash flow further lowering valuations.

The Crunch Goes Global: Exit Anxiety Spreads

The venture capital liquidity crunch, though particularly pronounced in the United States, is also significantly affecting markets worldwide, creating widespread challenges for startup exits. In Europe, the situation has mirrored the U.S. closely, with venture-backed exit values plunging sharply in 2023 to their lowest levels in a decade (13). European startups delayed IPO plans, and few major listings succeeded. Even prominent IPOs, such as UK-based Arm listing in the U.S. or Germany’s Ionos IPO in Frankfurt, struggled to meet expectations. Mergers and acquisitions similarly dropped, resulting in minimal liquidity for investors.

Regional Realities: Delays, Discounts, and Dim Prospects

In Asia, although exit activity fared somewhat better, surpassing North America’s total exit values due to large transactions primarily in China and India, overall exit values remained significantly below peak levels of previous years. Regulatory issues, geopolitical tensions, and valuation resets slowed IPO momentum in China, while India’s tech IPO surge from 2021 notably cooled down. Markets in Southeast Asia and Latin America, historically limited in terms of venture exits, experienced an intensified scarcity, with only rare exceptions like Indonesia’s GoTo IPO providing some relief (4). 

Globally, factors such as inflation, rising interest rates, geopolitical uncertainty, and regional economic issues contributed to the exit drought. Startups worldwide have increasingly prioritized financial sustainability and internal resilience rather than pursuing immediate exits. Governments in some regions are responding with measures to encourage IPOs or alternative exit strategies, but these initiatives remain limited in effectiveness until broader market conditions improve. Overall, the global venture ecosystem remains stalled, waiting for favorable market shifts that might finally ease the exit bottleneck.

Is the Logjam Finally Breaking? Early Green Shoots Suggest a Thaw

The private equity sector initially started Q1 2025 on a strong note, building on 2024’s rebound in deal and exit activity. The first quarter showed promising signs with 402 exits totaling $56B in value. If this trend were to continue, 2025 would potentially recover some of the lost valuation from the previous years and provide some much needed liquidity for investors (3). 

IPOs Lag, M&A Leads the Way

Markets Are Open—But Issuers Stay Home

Despite favorable market conditions in early 2025, major IPOs in both the US and Europe continue to face delays. Even with strong equity indices and anticipated Federal Reserve rate cuts creating what should be an attractive environment for public offerings, issuers remain reluctant to enter the market (1). These delays are particularly noteworthy considering that earlier expectations had positioned 2025 as a rebound year for IPO issuance. The hesitation stems from various factors including political uncertainty surrounding recent policy shifts particularly President Trump’s tariffs.

Despite the ongoing venture capital liquidity crisis, cautious optimism suggests that the exit market may gradually improve during 2025. Venture capitalists anticipate increased exit activity compared to the drought years of 2022 and 2023. Early indicators from 2024 provide some hope, with a handful of notable tech IPOs successfully launching, including Reddit, Astera Labs, Ibotta, and Rubrik, signaling modest reopening of the IPO market.

The Long Road to Recovery

A New Exit Playbook: Profits, Patience, and Optionality

The first quarter of 2025 also showed promising signs, marking the strongest period for venture-backed M&A activity since 2021. Analysts expect M&A transactions to dominate near-term exits, particularly as public market conditions slowly stabilize. Strategic acquisitions, especially within sectors like fintech, healthtech, and SaaS, are predicted to increase as corporate buyers with strong balance sheets pursue growth at more reasonable valuations.

However, venture industry veterans warn that a return to the exuberance of 2021’s exit market is unlikely. Startups and investors must adjust expectations, acknowledging that valuations have permanently reset lower than peak market multiples seen in previous years.

In response, startups have shifted focus towards profitability, sustainable operations, and efficiency, positioning themselves to capitalize on exit opportunities once the market improves. Many companies that raised at high valuations during the 2020–2021 boom now face valuation pressures, prompting them to delay exits and potentially accept down-round funding or strategic acquisitions at reduced prices. Additionally, alternative exit strategies such as secondary sales, direct listings, and mergers are gaining traction as creative solutions to the liquidity bottleneck.