Is the economy set for weakest half-decade performance in 30 years? 😫

January 15, 2024

Week of January 15th, 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. Fever (Entertainment): the New York-based live-entertainment discovery platform, raised $110 million in a round led by Goldman Sachs, valuing the company at $1.8 billion

  2. ExtraHop (Cybersecurity): the Seattle-based network detection and response startup, secured $100 million in growth capital from undisclosed existing investors

  3. Second Dinner (Gaming): the Los Angeles-based game development studio raised $100 million in a Series B led by Griffin Gaming Partners

  4. Harbor Health (Health Care): the primary and specialty clinic group received $95.5 million in a funding round led by General Catalyst

  5. Quora (Information Services): raised $75 million from Andreessen Horowitz. The funding will support the growth of Poe, Quora's AI chat platform

Venture capital (VC) firms are considering selling their startup stakes to secondary buyers due to the challenging M&A and IPO environment, marking the worst in over a decade. Continuation funds, allowing existing limited partners (LPs) to sell aging assets or roll investments into new funds, are gaining momentum

  • Despite increased interest, few transactions have occurred, primarily due to a significant valuation disconnect between what new investors are willing to pay and existing investors' perceived asset value: Secondary buyers demand higher discounts than most VCs are comfortable with

  • As auditors review 2023 financials, additional markdowns are expected, potentially easing VCs into selling at discounted prices

  • The popularity of continuation funds arises from providing options for LPs in a prolonged period of startups staying private

INDUSTRY WORLDWIDE

North American startup investors concluded 2023 with the weakest quarter of the year, marked by a significant decline in late-stage deals amid a challenging exit environment

  • Total investment across all stages for the year reached $144.3 billion, a 37% decline from the previous year

  • The number of reported round counts across all stages dropped by 31% from the prior year

  • Late-stage dealmaking was notably muted, with $15.7 billion invested in startups and growth-stage companies at Series C and beyond

  • Despite the overall downturn, some bright spots included Q4 rounds exceeding $1 billion, particularly in areas such as AI, cleantech, biotech, and next-generation manufacturing

  • Exits through M&A and IPOs faced challenges, with acquisition activity below peak levels and a dull IPO market

In 2023, funding to European startups totaled $52 billion, reflecting a 39% year-over-year decrease from the $86 billion invested in 2022. Despite the decline, Europe's share of the venture capital ecosystem increased since 2021, and the downturn in 2022 affected Europe less compared to North America and Asia

  • Late-stage funding saw the deepest cuts, nearly halving in 2023, while seed and early-stage funding were down 30% year over year

  • AI startups in Europe raised $5.8 billion in 2023, with notable investments in companies like Aleph Alpha, Mistral AI, Poolside, DeepL, and Synthesia

In 2023, venture funding for startups in Asia experienced a substantial 38% year-over-year decline, reaching its lowest level since 2015 at $78.1 billion. The final quarter of 2023 was particularly challenging, with only $15.6 billion raised, the lowest quarterly amount since Q4 2015

  • Deal flow also slowed, with a 13% decline in completed deals compared to the previous quarter and a 22% drop year-over-year

  • The funding decline affected all stages, with early-stage funding leading the way with a 47% drop, followed by angel and seed funding, which fell by 34%, and late-stage and technology rounds, decreasing by 30%

  • Geopolitical tensions, especially between China and the U.S., and conflicts, such as in Israel, contributed to the funding decline

  • Observers suggest that the challenges will likely persist into the new year, challenging the idea of a quick market rebound

🏦  ECONOMIC SNAPSHOT

The International Labour Organization's (ILO) World Employment and Social Outlook Trends 2024 report reveals that just over 5% of the global workforce is unemployed, an improvement from pre-pandemic levels. However, the ILO anticipates an increase of two million job seekers in the next year, the slowest half-decade of global economic growth in 30 years

  • Despite declining since 2020, the number of workers living in extreme poverty increased in 2023

  • Issues such as persistent inflation, the informal workforce, and gender and youth unemployment persist, and despite technological advances, productivity growth has slowed

The World Bank's Global Economic Prospects report indicates that the global economy is experiencing its slowest half-decade of GDP growth in 30 years by the end of 2024. While the risk of a global recession has diminished, mounting geopolitical tensions pose new threats

  • Global growth is projected to slow for the third consecutive year, with developing economies growing 3.9%, and low-income countries at 5.5%, below expectations. Advanced economies are expected to see a slowdown

  • To address climate change and achieve development goals by 2030, developing countries require a substantial increase in investment, approximately $2.4 trillion annually

  • WB’ report also identifies issues in commodity-exporting developing economies, noting that fiscal policies intensify boom-and-bust cycles, contributing to instability

  • Measures such as disciplined fiscal frameworks, flexible exchange rates, and avoiding capital movement restrictions could help reduce this instability, potentially boosting per capita GDP growth by 1% every four or five years

  • Full Global report

Americans hold a negative view of the U.S. economy despite positive economic indicators, such as GDP growth and low unemployment. Several factors contribute to this disconnect, including dissatisfaction with prices, concerns about structural issues like economic inequality, and negative media coverage

  • Financial distress related to credit cards has reached Great Recession levels, with more people turning to credit cards to cope with higher costs of essentials

  • A growing number of Americans express difficulty in paying household bills, and housing affordability has become a challenge, particularly in cities where rising home prices and interest rates make homeownership less accessible for many

In 2023, the U.S. economy avoided a recession, and the job market remained robust with steady inflation. The optimism is expected to continue in 2024, with a chance of a "soft landing" and Federal Reserve interest rate cuts. However, businesses still face risks, including concerns about a potential recession, inflation, and interest rates

  • A survey indicates that 37% of U.S. chief executives are prepared for a recession

  • Inflation, despite slowing, remains above the Fed's target, affecting businesses' costs and labor quality

  • Political gridlock and polarization in Congress are seen as risks, affecting government functioning and stability

  • Some businesses have already initiated cost-cutting measures, and major companies, including Google, BlackRock, Amazon, Duolingo, and Citigroup, have announced layoffs

🧑🏿‍🤝‍🧑🏽 IMPACT & DIVERSITY

In 2023, female founders experienced the third-highest amount of venture capital (VC) raised for startups, according to PitchBook's US VC Female Founders Dashboard. Despite a strong finish, the total amount of money raised declined for the second consecutive year

  • VC investment in startups founded by women is settling into a post-pandemic normal, with higher capital raised across fewer deals than pre-pandemic levels

  • Companies with both male and female founders received a historically high share of VC capital, accounting for 20.7% of total US VC funding, while exclusively female-founded startups received only 2%

  • Mixed-founder companies raised more capital over fewer deals, with industry concentration playing a role. Software was a significant contributor across both groups, but certain industries like B2B services and pharmaceuticals/biotech disproportionately favored mixed-founder companies

🚀 IPOs

The Forbes article underscores the significance of five potential IPOs poised to make a substantial impact across diverse industries. However, a cautious approach is necessary when evaluating the IPO outlook for 2024, given the intricacies of macroeconomic conditions. Factors such as escalating unemployment rates, heightened interest rates, and the imminent threat of a recession contribute to an environment that demands careful consideration and prudence

  1. Skims: An innovative fashion brand founded by Kim Kardashian in 2019, its potential IPO is fueled by its strong market presence, celebrity endorsements, and financial success

  2. Plaid: A fintech company that connects financial applications with users' bank accounts, playing a crucial role in the digital financial landscape. Despite delays in previous IPO plans, Plaid remains an interesting prospect for investors due to its integral position in the fintech sector

  3. Discord: A versatile digital communication platform that has expanded to cater to diverse online communities. Discord's anticipated IPO is driven by its rapid growth, user-friendly features, and adaptability to evolving communication trends

  4. Chime: A fintech company offering mobile-first banking services, emphasizing user convenience and accessibility. Chime's innovative approach to fee-free banking and its rapid growth in the fintech sector position it as a top IPO pick in 2024

  5. Turo: A peer-to-peer car-sharing platform that provides an alternative to traditional car rental services. Turo's unique business model, leveraging privately owned vehicles, makes it a standout in the sharing economy

In November, the Federal Reserve's indication of expected interest rate cuts in 2024 boosted technology and publicly listed stocks. However, most venture capital managers are cautiously optimistic about 2024, anticipating a slow IPO market until 2025

  • Frank Rotman of QED Investors expects a few IPOs in 2024, with the real market opening up in 2025 as companies need more time to mature

  • The Kauffman Fellows' survey reveals mixed sentiments, with 33% of VCs predicting a challenging year for exits

  • The backlog of unicorns preparing for IPOs suggests a gradual shift, with companies now required to demonstrate a clear path to profitability

  • M&A and roll-up strategies are expected to be more prevalent, especially in climate tech and growth funds

🗞️ 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.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 report here

8 Wealth Creation Essentials

Fraud Alert: How to Identify and Protect Yourself from Financial Scams

While fundraising as a fund manager, I have found out that trust is not earn easily. I might have faced some biases because I am too brown, culturally different and speaks with an accent. I rely on math, strategy, processes, and performance to present our fund, moving the conversation from how I look, to what I am doing. Why should someone trust me with their money, or even worse, their clients' money? I, also expect  that my counterparts do their jobs andunderstand the risk-reward profile of an investment in venture capital. Even as a top 1% performance firm with a super strict risk management strategy, less than 10% of your portfolio should be with us

Whether you're a seasoned investor, a finance professional, or simply someone keen on staying informed, this article is a must-read

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Happy reading,

AI8’s Research & Performance Team

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