Mexico Takes the Lead 🇲🇽

February 12, 2024

Week of February 12th, 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

  1. Epic Games secured $1.5 billion in funding through a partnership with Disney, marking a substantial decrease in valuation but still making headlines in the gaming industry

  2. NinjaOne, a security company based in Austin, Texas, raised $232 million for its endpoint management and monitoring services, reflecting the growing importance of cybersecurity in a remote work environment

  3. Neurona Therapeutics, a biotech firm focusing on regenerative cell therapy for neurological disorders, received $120 million in financing, showcasing the ongoing interest in healthcare innovations

  4. Starship Technologies, a robotics startup specializing in delivery robots, raised $90 million to expand its last-mile delivery services

  5. Platform Accounting Group secured $85 million for its professional services in tax compliance and outsourced accounting, highlighting the financial potential in traditionally less glamorous industries

January defied the usual post-holiday slowdown in the business world, with an impressive surge of investment activity. Nonetheless, some companies secured rounds of $100 million or more, reflecting robust investor confidence across various sectors:

  1. Generate Capital led the pack with a substantial $1.5 billion investment in renewable energy projects. The Company focuses on green infrastructure investments and has garnered significant support from investors

  2. Recurrent Energy secured a noteworthy $500 million preferred equity investment for its utility-scale solar and energy storage projects

  3. Quantinuum, a quantum computing company raised $300 million, highlighting growing investor enthusiasm for quantum technology's potential

  4. Flexport, a logistics giant, raised $260 million in funding, showcasing continued interest in the logistics sector despite significant challenges

  5. Bilt Rewards, a loyalty rewards startup, raised $200 million, driven by its innovative approach to rewarding consumers for rent payments and expanding its network to include various retail purchases

In recent years, one of the most pressing issues facing venture capital is the challenge of converting paper returns into actual cash. Limited partners are increasingly dissatisfied with the lack of capital returned to them by venture managers, leading to reluctance in reinvesting with underperforming VCs

  • Recent cash distributions have fallen to their lowest point in nearly 14 years compared to historical levels, according to PitchBook data for 2023

  • LPs closely track metrics like distributed to paid-in capital (DPI) to gauge how much capital a manager has returned relative to the initial investment

  • This trend is concerning for LPs as they rely on these distributions to reinvest in new VC funds

  • While there are indications that the IPO market may improve soon, in the meantime, VCs with low DPI may seek to sell their stakes in the secondary market as a means of generating liquidity for investors

Late-stage startups experienced a significant slowdown in value accumulation in 2023, with valuations growing at the slowest rate since 2016

  • The median increase in valuation between funding rounds dropped by 61.6% YoY for late-stage startups, reaching $6.6 million, while venture growth-stage companies saw an even slower growth with a median increase of $2.4 million between rounds

  • Founders are implementing drastic measures to extend cash runways and avoid undesirable outcomes like flat or down rounds or forced sales, including cost cuts and layoffs

  • The median duration between funding rounds for late-stage companies has extended to 1.76 years, the longest in at least a decade

INDUSTRY WORLDWIDE

A recent congressional investigation has revealed that five prominent American venture capital firms have invested over $3 billion in Chinese tech companies, sparking concerns about national security and the empowerment of a strategic competitor

  • Firms like Sequoia Capital and Qualcomm Ventures have significantly contributed to China's tech sector,  around $1 billion of the investment has gone into China's semiconductor industry since 2001

  • Some of these investments have supported Beijing's military and surveillance activities, with approximately $180 million directed towards firms linked to the Chinese military

  • In response, there have been calls for policy changes to prevent U.S. venture capital from furthering Chinese national security interests: the Biden administration has already imposed restrictions on U.S. involvement in the Chinese chip industry

🏦  ECONOMIC SNAPSHOT

In 2023, the United States imported more goods and services from Mexico than from any other country in the world, displacing China for the first time in 21 years. Mexican exports to the U.S. totaled $475.6 billion, marking a 4.6% increase compared to 2022, while imports from China decreased by 20% to $427.2 billion

  • Two main factors drove this shift in trade dynamics: firstly, the U.S. government's efforts to "decouple" its economy from China, and secondly, Mexico's endeavors to leverage the USMCA trade agreement to position itself as an attractive destination for companies seeking to relocate from China

  • Reshoring initiatives are reshaping global trade, while China's share of U.S. imports has declined, other countries like India, Vietnam, Poland, Indonesia, and Romania are also filling the gap left by China's reduced exports

  • Despite some efforts to stabilize relations, distrust persists between the U.S. and China, and companies continue to relocate production from China to neighboring countries like Vietnam or Mexico

The economist Arthur Okun once advocated for a "high-pressure economy," an economy with robust GDP growth and low unemployment, which the Biden administration has pursued: the labor market is thriving and we’re witnessing historically low unemployment rates. However, concerns linger due to uncertainties surrounding market volatility. Three pressure points warrant close attention:

  • The current economic cycle is far from typical, marked by the pandemic, geopolitical events, and macro distortions affecting traditional economic indicators

  • There's a disparity between economic data and the lived experience of many Americans: while employment and wages are rising, there's a sense of long-term economic vulnerability. Rising costs of education, housing, and healthcare contribute to economic insecurity, particularly among the middle class

  • The "everything bubble," characterized by soaring asset prices across stocks, housing, and other sectors, is fueled by corporate profits but also reflects market concentration in a few tech giants: the valuation of companies like Apple raises questions about market stability and asset bubbles

At the end of last year, stocks and bonds saw a rally fueled by optimistic expectations for 2024, including hopes for lower inflation, strong economic growth, a resilient labor market, and potential interest-rate cuts. Despite this positive outlook, recent data and comments from Fed Chair Jerome Powell have tempered these expectations

  • Business sentiment indicators suggest a possible increase in production, which could lead to inflationary pressures. However, Powell has emphasized the need for further evidence of sustainable price easing before considering rate cuts

  • This cautious approach indicates the Fed's desire for inflation to reach its 2% target, raising the risk of an unexpected economic setback

Investors celebrated recent progress on inflation as the S&P 500 briefly surpassed 5,000 for the first time on Thursday 8th amid strong economic growth, the rise of artificial intelligence, better-than-expected earnings, and expectations of rate cuts from the Federal Reserve

  • It took nearly 41 years for the index to reach its first major milestone of 1,000 and reached its previous milestone of 4,000 in April 2021

  • The index hit a new record on January 19, continuing to set six new highs in January

So far this year, the index is up about 5.4%, following a 24% jump in 2023, with much of the gains driven by a few tech giants dubbed the "Magnificent Seven" –Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla–

In 2023, Bitcoin experienced a remarkable 156% increase in value, marking its best year since 2020 and outperforming traditional asset classes such as stocks, bonds, and commodities. Several factors contributed to Bitcoin's surge, including anticipation for the launch of 11 Bitcoin ETFs, which would enhance accessibility to a broader investor base

  • Comparatively, the S&P 500 posted a 25% return in 2023, exceeding its historical average, while U.S. bonds saw a 5% return

  • Over the last decade, Bitcoin has exhibited significant volatility but also remarkable returns, averaging 671% per year

  • Despite fluctuations, Bitcoin's value surged to all-time highs in 2021, reaching $64,899 and establishing itself as a trillion-dollar asset class

🧑🏿‍🤝‍🧑🏽 IMPACT & DIVERSITY

While there has been an increase in venture capital funding for female-founded startups in recent years, the numbers still lag behind those for male-founded startups

  • In 2023, companies founded solely by women received just 2% of the total capital invested in venture-backed startups in the US

  • Deal count by female-only funds stands at 8,799, representing a total of $37.6 billion in capital invested. In contrast, female and male founders together secured 28,807 deals, attracting a substantial $247.6 billion in capital

  • The software and B2B services industries emerge as the focal points for female founders, with the highest concentration of deals observed in these sectors

There has been an increase in the announcement of funds launched by women, almost 160 firms have raised capital or submitted filings with the SEC since January 1, 2022. Here are some insights on women-led funds:

  • Women-led VC firms raised roughly $3.5 billion in 2023, $500 million more than they raised in 2022

  • A little over 3% of the $107 billion raised by venture funds worldwide in 2023 went to women-led VC forms, up from 1.9% of the $158 billion raised worldwide in 2022

  • The growth in women-run funds is in response to the growth in women’s wealth, entrepreneurial success and commitment to change the historical underinvestment in women-founded companies

  • Bank of America is the most active institutional investor in women-led VC funds, having committed to 11 different funds from a list of 160

🚀 IPOs

The IPO market is experiencing renewed interest, with investors and startups closely monitoring developments. Anticipated interest rate cuts in the first half of 2024, alongside the U.S. economy's resilience and positive economic indicators, signal a revival in IPO activity

  • However, the current IPO landscape differs from recent years, with investors becoming more discerning and demanding, as companies can no longer rely solely on buzzwords like "ESG," "cryptocurrency," or "artificial intelligence" to attract funding

  • Mature companies are increasingly seeking to go public, with high-profile offerings expected to set the tone for future market activity

  • International companies are seeking exposure to U.S. capital markets, viewing them as ideal venues for liquidity events, specially in Southeast Asia and Europe

In Reddit's r/stocks forum, users are expressing skepticism about the company's upcoming IPO. Many anticipate a decline in Reddit's fortunes post-IPO, questioning the company's profitability prospects:

  • Amid the tentative revival of the US IPO market, Reddit has revived its plans to go public. However, its expected $5 billion valuation is a significant drop from its 2021 fundraising valuation of $10 billion, reflecting both market changes and Reddit's slower-than-expected progress in attracting advertisers and transitioning to mobile platforms

  • Reddit has lagged in monetizing its platform, with a smaller user base and lower revenue compared to Meta. Despite 70 million daily users, its revenue, primarily from digital advertising and some premium subscriptions, remains minimal compared to Meta's

  • At a $5 billion valuation, Reddit would be priced at just over six times its estimated trailing sales, positioning it below Meta and Pinterest but on par with Snap

Venture capitalists in China are facing significant pressure to adapt their strategies amidst a changing landscape marked by stricter regulations, geopolitical tensions, and an economic slowdown:

  • Traditionally, renowned venture capital funds in China raised funds in U.S. dollars from international sources, which were then invested in Chinese startups targeting U.S. IPOs. However, due to increased regulatory scrutiny and challenges in listing Chinese companies in the U.S., many international investors have paused investments in China

  • Recent developments, including increased scrutiny from both U.S. and Chinese authorities, have led to a reevaluation of investment strategies. Chinese companies seeking IPOs now face stricter regulations, prompting venture capitalists to focus on domestic markets for exits, such as A-share IPOs

  • Chinese authorities are actively promoting industrial development, particularly in hard tech sectors. Venture capitalists are increasingly aligning their investments with government-backed initiatives, leading to larger deals in areas like new materials for renewable energy and factory automation components, resulting in a more state-concentrated venture capital scene

The year 2024 could potentially witness a surge in fintech initial public offering, several noteworthy companies are on the radar for potential IPOs:

  1. Stripe: despite previously setting a deadline for itself to go public, Stripe has not yet filed for an IPO. However, it raised substantial capital in 2023 and continues to expand its offerings beyond fintech

  2. Klarna: the company has taken steps toward an eventual IPO, including restructuring its legal entity and achieving positive financial performance

  3. Chime: although rumors suggest Chime's intentions to go public, its valuation has fluctuated, and it may consider an IPO in 2024

🗞️ AI8 VENTURES HIGHLIGHT

Alpha Impact 8 Ventures is thrilled to share our latest insights into the dynamic world of investments with our 2023 Venture Capital Report, here’s an updated version that dives into the ever-evolving landscape of financial markets.Just a few months ago, Michael Burry, the legendary fund manager who famously profited from shorting the US housing market in 2008, bet more than $1.6 billion on a Wall Street crash by shorting the S&P 500 and Nasdaq-100. Warren Buffett’s money pile reached record highs of $157 billion as Berkshire Hathaway disposed of a net $33 billion of stocks over the past three quarters. Is there something Buffett and Burry know that the rest of us don’t?Check out the full updated report here

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Happy reading,

AI8’s Research & Performance Team

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