A new report released today by early-stage venture capital fund Forum Ventures LLC has found a slight resurgence in the pre-seed investment market even as late-stage venture capital investments continue to grapple with a broader downturn.

The Forum Ventures’ second annual State of VC Market report was compiled by surveying 70 U.S. venture capital funds, including Outsiders Fund Management LLC, High Alpha Capital Management LLC, Outbound Capital Management LLC, Female Founders Fund LLC and Right Side Capital Management LLC. The survey was conducted over two weeks in early November and also collected data on 158 pre-seed rounds that closed in 2023.

The report found that the majority of companies receiving investment were based in major tech hubs such as New York City and the San Francisco Bay Area, with each location accounting for 19.6% and 24% of investments respectively. Financial technology, generative artificial intelligence and the future of work were the most popular industries for investment.

None of those findings is surprising: It doesn’t take a rocket scientist to know that generative AI startups are particularly popular in the Bay Area. But where the report gets interesting is where venture capital funds are flowing, and though overall VC funding continues to decline, there is increasing interest in pre-seed startups.

According to the report, there has been an increase in collaboration among seed investors, more inbound activity and a trend toward more active deal sourcing. However, the overall availability of capital has fallen and the growing number of companies seeking funding has led to a less urgent approach to closing deals.

The report notes a overall decline in the number of seed and pre-seed rounds, attributed to factors such as economic instability and the need for more bridge rounds. Despite these challenges, the recovery of the pre-seed market stands out, even as the broader market remains uncertain and fluctuating, with rising interest rates and investors becoming more cautious and thorough in their due-diligence processes.

Although the increased interest in early-stage startups is positive, the report also delves into some of the negatives in the state of venture capital and startups. Of those surveyed, 75% said they had observed a decline in valuations, reflecting a narrowing gap between what companies seek in terms of valuation and what investors are willing to pay.

This adjustment was found to have led to an increase in extension rounds and internal bridge rounds, suggesting that investors are taking a more cautious approach. The slower pace of investment also underscores this caution, with investors adopting more measured and strategic approaches.

The report also notes that investment rounds are remaining open for much longer periods than in previous years, allowing emerging managers to invest more time and resources in thorough diligence. That may potentially lead to stronger returns to limited partners in the near future.

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