Week of August 19th, 2024

Welcome to AI8’s weekly newsletter, your ultimate source for curated insights and updates from the dynamic world of venture capital!

We’ve scoured the vast landscape of the web to bring you a comprehensive roundup of the industry’s top news articles, all in one convenient place. We keep you ahead of the game and in the know about all things related to the vibrant world of investments

🦄 STARTUPS

ROUNDS AND UNICORNS

The Week’s Biggest Funding Rounds: Cybersecurity Leads With Kiteworks’ Nearly Half-Billion-Dollar Deal (5 minute read)

1. Kiteworks (cybersecurity): raised $456M in growth equity, pushing its valuation above $1 billion. The cybersecurity firm, which allows secure sharing of sensitive data, saw a partial liquidity event for some investors

2. Halda Therapeutics (biotech): the startup focuses on prostate and breast cancer therapies, and secured $126M in a Series B extension

3. HistoSonics (healthcare): raised $102M in a Series D to advance its ultrasound-based system for treating liver tumors

4. Neptune Medical (medical); secured $97M in its first disclosed funding round to further its work in robotics for gastrointestinal disease treatment

5. Caresyntax (healthcare): raised $180M through a Series C extension and growth debt, with $80M in equity. The healthcare startup uses AI to enhance surgical precision and patient safety

More Early-Stage Startups Are Getting Minted As Unicorns (4 minute read)

The pace of creating unicorns, especially at earlier funding stages, is picking up again, with 70 new unicorns minted through July, including 28 after seed, Series A, or Series B rounds. While still below the highs of 2021 and 2022, the trend reflects investors' renewed willingness to invest at high valuations in young companies, particularly in AI

• Despite a drop in early-stage unicorns in Q2, sectors like Web3, retail, space, and defense also saw startups reaching $1 billion valuations early

• Despite the uptick in early-stage unicorns, the trend is inconsistent, with a significant drop in the number of new unicorns between Q1 and Q2 2024

Startups Take Longer To Close Rounds, As Funding Cliff Looms (5 minute read)

The time lapse between Series A and Series B funding rounds for early-stage startups has reached its highest level in over a decade, with the median duration hitting 28 months in 2024, and the average time extending to 31 months. This marks the longest wait since 2012

• Despite a few high-profile exceptions like Elon Musk's xAI and Figure, which secured Series B rounds in record time, many startups are experiencing prolonged intervals between funding stages

• Generally, startups now take two to three years between rounds to achieve growth milestones

• Of over 4,400 U.S. startups that raised Series A in 2020-2021, only about 1,600 have since secured a Series B

INDUSTRY

The Silent Venture Capital & Startup Recession (4 minute read)

The startup and VC ecosystems are currently facing a severe downturn, reminiscent of the 2008 financial crisis. Between 50% and 70% of VC-backed startups went out of business in 2023, with closures in early 2024 surpassing previous quarters

• Factors driving this crisis include a sharp increase in capital costs due to rising interest rates, market saturation, and shifts in consumer behavior

• In Q1 2024 alone, 60,000 jobs were lost across 254 companies, including major tech firms and numerous startups

• Valuations have dropped significantly, especially for late-stage companies, though Seed and Series A valuations remain complex due to liquidation preferences and warrant coverage

• Historically, companies founded during recessions, like Airbnb and Uber, have thrived, suggesting that the current wave of startups could emerge stronger in the long run

AI Startup Deal-Making Gaining Momentum — Is That Good? (5 minute read)

The M&A landscape for 2024 has been lackluster, but AI is providing a spark amid otherwise slow deal activity. In Q2, AI-related startups saw a 55% increase in acquisitions compared to last year, with 65 deals completed. However, this surge in AI deals might not all be driven by optimism

• Some startups may be facing financial strain due to high costs and slow revenue growth, prompting them to seek exits through strategic partnerships or "non-deals" that allow Big Tech to acquire their technology and talent without triggering regulatory scrutiny

• For instance, Google's recent "non-exclusive" licensing deal with Character.ai, which also involved buying out investors and re-hiring the co-founders, reflects this trend

• As investors recognize the immense resources required to compete in AI, more deals—both traditional and creatively structured—are likely to emerge as Big Tech continues its AI land grab

The Shifting Landscape Of Venture Capital: Emerging Managers Vs. Established Funds (5 minute read)

The VC landscape is increasingly favoring larger, established funds over emerging managers, with significant disparities in capital sourcing. A study by Allocate found that over 60% of Fund 1's capital comes from High Net Worth Individuals (HNWIs) and small-to-medium Family Offices, whereas larger funds rely on these sources for less than 5-10%

• In Q1 2024, the top five fundraises accounted for 45% of total VC capital, and projections suggest similar trends for the entire year

• Institutional investors are directing capital towards larger funds due to factors like portfolio management efficiency and perceived safety, which might lead to suboptimal capital allocation and affect overall VC returns

• Emerging managers face challenges such as reduced capital from HNWIs, market volatility, and high illiquidity premiums

VC fund returns capture best quarter since 2021, eking out 0.4% gain (2 minute read)

After a challenging 2023, VC funds showed a modest recovery in Q4, reporting a 0.4% return, the first positive quarterly performance since 2021. This uptick coincided with a broader improvement in alternative investments, including buyout funds and infrastructure

• Despite this, VC performance remains sluggish compared to pre-2022 highs, with a 13% 10-year horizon IRR

• The anticipated Federal Reserve rate cuts are expected to boost dealmaking attractiveness, potentially improving valuations and easing exit challenges for VC-backed companies

• However, the disparity remains stark between high-performing startups and those struggling, with many companies accepting small M&A deals rather than achieving significant returns

🏦 ECONOMIC SNAPSHOT

America’s economy is wildly confusing right now. Here’s what’s really going on (5 minute read)

Recent concerns about an imminent recession in the US economy appear to have been exaggerated, driven by an overreaction to a single labor market report. While unemployment spiked unexpectedly, the broader economic landscape remains strong, with no serious predictions of an imminent recession

• However, despite inflation cooling, Americans continue to feel financial pressure, particularly due to high housing costs

• Consumer spending remains robust, with retail sales surging 1% from June to July, indicating that Americans are still spending, albeit more budget-consciously

• The housing market remains challenging, with high prices and mortgage rates continuing to strain affordability, though some relief may be on the horizon as rates decline and supply increases

Investors look to Powell's Jackson Hole speech for clues about Fed’s first cut (6 minute read)

At this year's Jackson Hole symposium, Federal Reserve Chair Jerome Powell will face a dramatically different backdrop compared to last August, when the primary concern was how long high rates would need to stay to curb inflation. Market expectations now favor a 25 basis point cut over a 50 basis point reduction, with a strong August jobs report potentially influencing the final decision

• This year, with inflation cooling and the job market slowing, the focus has shifted to how much the Fed will cut rates in September

• Powell signaled a potential 25 basis point cut but ruled out a larger reduction

• Historically, Jackson Hole speeches have been used to outline longer-term policy directions, and Powell's upcoming remarks are expected to emphasize the balance between inflation control and employment

World stocks extend week-long rebound after slew of US data (4 minute read)

Global stock markets rose on Friday, extending their weekly gains after positive US economic data eased recession fears, shifting focus to a potential interest rate cut by the Fed in September. Wall Street saw notable increases, with the Dow Jones up 0.25%, the S&P 500 gaining 0.2%, and the Nasdaq rising 0.2%, leading to weekly gains of 2.7%, 3.7%, and 5%, respectively

• The MSCI world index climbed 0.5%, and the STOXX 600 gained 0.3%, marking its best week since May

• The VIX index, a measure of market fear, dropped to 15, reflecting improved sentiment

• Global markets also saw a strong performance in Japan, with the Nikkei up 3.6%

🌱🌎 Impact & Climate Resilience

Here Are the Most Common Anti-DEI Legal Cases Right Now -- and What You Need to Know About Them (3 minute read)

DEI efforts are increasingly facing legal challenges across the US, with significant implications for business owners. The Meltzer Center for Diversity, Inclusion, and Belonging at NYU's School of Law has launched a DEI litigation tracker, monitoring over 100 anti-DEI cases that could impact workplace practices

• The most common cases involve targeted programs, such as grants or internships for underrepresented groups, and workplace discrimination

• Insights from these cases suggest that businesses might better defend their DEI initiatives by focusing on inclusive content rather than specific cohorts

• While some legal challenges have led companies to broaden eligibility criteria for their DEI programs, concerns about the risks of diversity training appear to be overstated, as courts have generally dismissed such claims

These CEOs Still Have Chief Diversity Officers. Here's Why (5 minute read)

Despite significant pushback, some CEOs continue to prioritize DEI in their companies, even elevating DEI roles to the C-suite level. After the surge in corporate DEI initiatives following George Floyd's murder, DEI job postings increased by more than 36% between July 2021 and July 2022, and 74% of S&P 500 companies had a chief diversity officer by 2022, compared to less than 50% in 2018

• However, DEI-related jobs declined by 10% from early 2023 to mid-2024

• Despite this, companies like Bonterra, Schreiber Foods, and SurveyMonkey remain committed to DEI, viewing it as integral to business success

• For instance, Bonterra reported a 7.2% increase in engagement among Black employees and a 14% increase among Latinx employees in their 2024 survey

🚀 IPO & Exits

VC fund purchases surge (5 minute read)

Purchases of venture funds on the secondaries market spiked in the first half of this year, according to a report by Setter Capital. The secondaries market as a whole reached $67.7 billion, a notable increase from its H1 2023 total of $45.1 billion, with H1 2024 secondary fund purchases rising 35% to $38.1 billion and direct secondary purchases growing 75% to $29.7 billion

• VC fund purchases saw the largest jump within the PE category, rising 151% YoY to $2.7 billion

• When underwriting VC fund secondary purchases, buyers targeted an IRR of 20.4%, the highest of all asset classes

• The most active buyers in secondary transactions were dedicated secondary funds (93%), followed by funds of funds (4%)

• Pension funds (33%) and GPs (17%) were the most active sellers in secondary transactions

🗞️ AI8 VENTURES HIGHLIGHT

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Check Beyond Survival: Opportunities in Climate Change

It all started in 2010 after a great conference with Mr. Al Gore. I was in Mexico City attending an event where Mr. Gore presented what the climate would look like if we did not act quickly and reduce our carbon emissions. That day, Mr. Gore’s team made his “models” available for everyone to study and play with. He told me that the largest desert in the world would be what used to be Mexico, California, Nevada, Arizona, New Mexico, and Texas, all the way to the State of Mexico. He didn’t know if Mexico City would be a part of it because of its altitude. That day, we walked several miles to our dinner because of the bad news.

Introducing: Climate Resilience Technology

Alpha Impact 8 Ventures is pleased to announce that we are adding a third investment vertical to our thesis: Climate Resilience Technology.

Climate Resilience Technology encompasses digital solutions designed to help communities, businesses, and ecosystems adapt to and recover from the impacts of climate change. We're looking for scalable technologies addressing existing problems caused by climate change.

Our focus areas include:

• AgFinancing: Integrating advanced technologies and tailored financing solutions to improve access to capital for agricultural growth and trade, enhance food security, boost productivity, predict disruptions, and optimize logistics.

• Water Management Systems: Utilizing advanced technologies and financing solutions to address water scarcity and inefficient water use exacerbated by climate change.

• Energy Management and Optimization: Implementing advanced technologies and financing solutions to tackle increased energy demand and grid instability due to extreme weather conditions. This includes smart grids, microgrids, energy management software, and demand response systems that optimize energy use, integrate renewable energy sources, and enhance grid resilience.

• Data, Analytics, and Predictions: Companies that utilize data and advanced analytics to predict and mitigate disruptions and climate-related events. These solutions provide crucial insights and foresight, helping communities and businesses to prepare and respond effectively to climate challenges. Advanced technologies and artificial Intelligence to enhance supply chain visibility, predict disruptions, and optimize logistics ensure continuity and efficiency.

Alpha Impact 8 Ventures is disrupting the industry, generating wealth, creating technology, providing access, leveling the play field, reducing systemic barriers, and building a resilient world.

Become part of the our revolution.

Happy reading,

AI8 Ventures’ Research & Investment Team