Two funds, same vintage. Both raised in 2020, both seed to Series A focused, both targeting B2B SaaS in the US and Europe. Comparable deal quality. Comparable GP experience. Fund A deployed at a consistent pace: roughly one-eighth of commitments per quarter across the full period. Fund B tracked three observable indicators, pre-money valuation step-up rates, median round size change quarter on quarter, and deployment pace across the industry, and adjusted its own pace in response.
In 2021, Fund B deliberately slowed deployment when the median Series A pre-money valuation in its target geography reached a level that was materially above the prior five-year average. It invested in eight companies rather than the twelve it had capacity for. It reserved proportionally more capital. In 2022 and 2023, when valuation multiples reset and round sizes compressed, it deployed at an accelerated pace. Six of its fourteen subsequent investments were made at pre-money valuations between 30 and 50% below the equivalent round size in 2021.
Fund A’s portfolio had higher paper marks in 2022. By 2024, Fund B had materially better DPI, better reserve positioning for follow-on rounds at its best companies, and a portfolio whose entry valuations gave the fund substantially more return potential per dollar invested.
Neither fund had better access to deals. Fund B had better access to cycles.
Most small and mid-size VC funds approach portfolio strategy as if market cycles do not exist. They deploy at a consistent pace regardless of whether valuations are at cycle highs or lows, and they manage reserve allocation without reference to where they are in the cycle. The funds that compound best across multiple cycles are not the ones with the best deal flow in any single period. They are the ones that adjust their deployment and reserve strategy to the cycle phase they are actually in.
The Four Cycle Phases, a Cycle-Adjusted Portfolio Strategy Framework, and the Indicators to Track
The four venture market cycle phases and their observable indicators
Venture capital markets move through identifiable phases. The transitions are not instantaneous, and different stages of the market can be at different phases simultaneously. A clear-eyed reading of the current indicators is the starting point for any cycle-adjusted strategy.
Expansion is characterised by rising valuations across stages, compressing time between rounds, increasing median round sizes, and growing LP appetite for fund commitments. Deal pace accelerates as more managers compete for access to the same companies. Investor FOMO begins to influence term sheets. The expansion phase of the most recent cycle was broadly 2019 through mid-2021, with the later stage accelerating particularly sharply.
Peak is characterised by valuation multiples at or near historical highs, deal timelines compressed to days rather than weeks, and increasing incidence of pre-emptive rounds at prices without negotiation. LP fundraising for VC funds reaches record levels. The 2021 peak produced the highest median Series A valuations on record across most markets, and the most rapid deployment of venture capital in modern history. The cost of participating at peak is not visible immediately. It is visible three to five years later when exit multiples are measured against entry valuations.
Contraction is characterised by declining valuations, rising incidence of down rounds and bridge rounds, fund managers becoming conservative, and LP distributions declining. The number of valuation step-ups globally fell to a ten-year low in 2023, and bridge rounds became particularly prevalent among late-stage companies whose valuation levels had decreased most significantly following the 2021 peak. Deal timelines lengthen as investors conduct more thorough diligence. Many funds slow deployment to preserve reserves for existing portfolio companies. This is the worst time to slow new investment, and the most psychologically natural time to do so.
Recovery is characterised by selective deployment, valuation reset at sustainable levels, and strong early vintage performance beginning to become visible. The current market is in this phase, though with significant internal differentiation by stage and sector. Fenwick’s annual 2025 Venture Beacon, published in February 2026, shows that early-stage up rounds improved to 82.2% in the second half of 2025, while late-stage down rounds increased to 20.2% for Series D+ companies, with Series D+ valuations declining 45% quarter on quarter in Q4 2025. This bifurcation is the defining structural feature of the current recovery: early-stage is genuinely recovering while late-stage is continuing to reprice.
Fenwick’s Q2 2025 Venture Beacon found that seed through Series C rounds demonstrated strong performance, with deal sizes growing 5 to 22% and valuations rising 3 to 60% quarter on quarter, while Series D+ rounds experienced sharp declines of 8.9% in capital raised and 48% in pre-money valuations. For a seed to Series B fund manager, this bifurcation creates a specific opportunity window: the early-stage reset of 2022 and 2023 has produced a cohort of companies with sound fundamentals and reset valuations that are now raising at Series A and Series B at prices that are materially more attractive than 2021 equivalents.
Cycle-adjusted portfolio strategy framework
| Cycle Phase | Deployment Adjustment | Valuation Discipline | Reserve Strategy |
| Expansion | Maintain pace; resist the pressure to accelerate as deal competition increases | Maintain valuation floors; accept that some deals will be lost to higher offers; document the decision rationale | Build reserves proportionally as entry valuations rise; reserve-to-initial investment ratio should increase as the cycle extends |
| Peak | Reduce pace by 20 to 40% from plan; accept that the portfolio will be smaller than targeted if valuations do not support disciplined entry | Enforce valuation floors strictly; prepare to be outbid on deals that do not clear internal return thresholds; the companies lost to overpriced competitors are usually the ones you are glad to have passed on 24 months later | Shift reserves toward existing portfolio rather than new investments; the best use of dry powder at peak is protecting existing positions when the market corrects |
| Contraction | Accelerate deployment into new investments; the contraction phase produces the best vintage entry points; maintain conviction to deploy when others are conserving | Valuation discipline remains essential but is self-enforcing at contraction: the market is resetting to levels where returns are viable; focus on companies with improving fundamentals, not just lower prices | Triage reserves explicitly: identify the portfolio companies that will be fundable externally versus those that require reserve capital to bridge to next milestone; do not allocate reserves pro-rata across portfolio |
| Recovery | Deploy selectively at above-average pace in the areas of the market that have genuinely reset; avoid areas still at elevated valuations (currently late-stage) | The recovery phase requires differentiated discipline: early-stage valuations have reset and are attractive; late-stage valuations remain elevated in specific sectors; distinguish these within portfolio construction | Reserves should reflect the specific follow-on funding environment: if the market is producing strong Series A and B outcomes, investing reserves in your best performing seed companies is high expected value; if the Series A market is selective, reserves may be better preserved |
The indicators a fund manager should track to assess current cycle position
Four categories of indicators, tracked consistently across time, are sufficient to assess cycle position without requiring macroeconomic forecasting.
The first is median pre-money valuation by stage in the target market. Tracking this quarterly across seed, Series A, and Series B in the relevant geography provides the primary signal. A rising trend above the five-year average indicates expansion or peak; a declining or resetting trend indicates contraction or recovery. SVB data shows that late-stage AI companies command a 100% premium over non-AI peers at Series C in 2025, while KPMG data shows global median pre-money valuations rebounding in 2025 but concentrated in AI. This divergence is itself a cycle signal: when valuation recovery is sector-concentrated rather than broad-based, the market is in an uneven recovery, not a uniform expansion.
The second is the incidence of down rounds and flat rounds in the target stage. Fenwick data shows that early-stage up rounds improved to 82.2% in the second half of 2025 while late-stage down rounds increased to 20.2%. A rising incidence of down rounds at any stage indicates that prior entry valuations were above the sustainable level, which is a lagging signal of the prior peak and a leading signal of continued repricing.
The third is the ratio of bridge rounds to new priced rounds. A high incidence of bridge rounds indicates that existing investors are supporting companies through a fundraising gap rather than new money entering at the market price. This is characteristic of deep contraction. As the bridge round incidence declines, the market is typically moving toward recovery.
The fourth is deployment pace across the industry. When the industry’s aggregate deployment rate accelerates beyond the growth of the LP capital base, the market is in expansion or peak. When it decelerates sharply, the market is in contraction. For a small fund manager without access to industry-wide data, a useful proxy is the median time between term sheet and close on deals the fund is seeing: compression indicates expansion or peak; extension indicates contraction.
The Implication
Cycle awareness is not market timing. Market timing implies precision in predicting when cycles begin and end. Cycle awareness implies adjusting the pace and valuation discipline of portfolio construction in response to observable evidence about where the market is. Wellington Management’s 2026 venture outlook frames the current environment as a period of reinvestment, characterised by selective deployment, quality focus, and access discipline, noting that the strong performance of 2025 IPOs combined with a growing backlog of IPO-ready companies suggests pent-up supply that should extend liquidity momentum into 2026. This is a recovery-phase description. The appropriate fund strategy for a recovery phase is not to wait until the recovery is confirmed and then deploy at expansion-phase pace. It is to deploy selectively and above prior-cycle pace in the areas of the market that have genuinely reset, while maintaining discipline in the areas that have not.
The one portfolio construction change to make in the current market is a reserve reallocation toward the best-performing seed investments from 2022 and 2023 vintage cohorts, before the Series A window for those companies peaks again. The companies that survived the 2022 to 2024 contraction with strong fundamentals are now approaching Series A at reset valuations with operational discipline the 2021 cohort did not require. These are structurally better follow-on investments than their 2021 equivalents at equivalent paper valuations. That window does not stay open indefinitely.