This article has been revised and corrected from the original version.

In speaking with venture capital leaders in the Los Angeles scene, many described the past several years of investing as “irrational exuberance,” a period marked by eye-watering company valuations and growth funds propelling multiple firms into the billion-dollar club.

Now, as 22-year-high interest rates hamper capital deployment and fundraising, venture capital must face the realities of a low-liquidity market and answer to a crop of investors who may be experiencing a downturn in the venture world for the first time.

According to Pitchbook’s venture capital data from last year, deal activity slumped from the peak seen in 2021. Just $171 billion was invested into companies, roughly half the amount invested two years prior. Tightened purse strings reflect a shortage of capital availability spurred in part by the public-offering and acquisition markets grinding to a near halt.

“When you don’t have exits coming fast and furious, then the entire market seizes up because there’s no capital funds to refresh the venture capital partners,” said Anna Barber, a partner at VC firm M13. 

Last year’s initial public offering market did see some high-profile venture-backed debuts, including ARM and Instacart, but the jump-start was a stark reminder of just how inflated the venture world’s valuations could be. Instacart’s almost $10 billion September entry on the New York Stock Exchange was a fraction of the $39 billion it was worth in 2021– a price tag backed by some of the leading names in venture capital, including Andreessen Horowitz and Sequoia Capital.

Barber is among the venture capitalists who see the current capital markets as back to business as usual, and an opportunity for limited partners to see which firms can gauge the companies with cycle-resilient business models. 

M13, a Santa Monica-based firm with $685 million in capital, has a majority of its team on portfolio companies’ operations. Even as the firm reserves at least half of its capital for follow-on investments to existing companies, M13 is focusing its efforts on helping companies build two to three years of runway.

“I think that’s been really valuable and meaningful in a challenging market where every company is trying to make their dollars go longer, being able to go further, being able to leverage support,” Barber said.

Fundraising standout

The other side of venture capital, courting limited partners, has proven difficult in current capital markets.

In looking at the Business Journal’s top venture capital firms from last year and 2022, billion-dollar entities like Century City-based Vida Ventures and Santa Monica-based Ominent Capital did not raise any additional capital last year. 

Pitchbook’s venture data shows that last year saw the lowest level of fundraising since 2017, with just $66.9 billion committed to venture capital funds globally, compared to the record-high $173 billion committed in 2022.

However, there was one local venture capital firm that worked opposite of the market downturn. Manhattan Beach-based B Capital broke its previous fundraising record and became the top local venture capital firm after raising a total of $2.1 billion last year.

Its third growth fund made up the lion’s share of this capital, with $2.1 billion committed from limited partners such as pensions, endowments and family offices. In June, Bloomberg reported B Capital was in talks to raise a $500 million for a new early-stage venture to follow its previous Ascent Fund II, which raised $250 million over two years ago.

For Gabe Greenbaum, a general partner at B Capital, having investors double-down on commitments during a market downturn serves to validate the firm’s expertise and strategy on artificial intelligence, fintech and health care.

“You really need to understand multiples in the market both publicly and what private comps trade at to really ensure that your entry point in many of these companies is right-sized,” Greenbaum said. “I think the market has brought that into focus for every venture fund.”

The firm, founded in 2015 by Facebook co-founder Eduardo Saverin and Bain Capital alum Raj Ganguly, is unique in its partnership with the Boston Consulting Group, which serves as a corporate merger and acquisition advisor able to support companies in their operations as well as go-to-market partnerships.

One such company was Gameplanner.AI, which last November became Airbnb’s first acquisition since the vacation rental company went public in a deal CNBC reported was worth around $200 million. According to Greenbaum, B Capital was the only institutional investor in GamePlanner, which is set to develop additional AI tools for Airbnb.

According to its portfolio page, B Capital currently has a stake in 122 companies, and Greenbaum says the firm is deploying additional capital.