Week of February 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

While there weren't any major funding rounds this week, in case you missed it, here's a recap of last week's largest funding rounds:

The Week’s Biggest Funding Rounds: The Mouse Invests Huge In Epic Deal (5 minute read)

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

Family offices set to boost alternatives allocations (3 minute read)

KKR's 2023 survey of global family offices indicates a growing trend towards alternative assets such as private debt, equity, and infrastructure. Chief Investment Officers (CIOs) are particularly active in this shift, planning to increase allocations to alternatives while reducing holdings in public equities and cash

• The average allocation to alternatives has increased by 200 points since 2020, reaching 52% of assets

• There is also a growing appetite for real assets, driven by key investment themes such as supply chain onshoring, energy storage, AI, and healthcare

• Older family offices show a different asset allocation approach compared to newer ones, with more established offices having less exposure to cash and more to private equity

AI Leads New Unicorn Creation As Ranks Of $1B Startups Swells (5 minute read) 

In 2023, only 95 startups became unicorns, the lowest count in over five years. Of those companies that joined the board, AI was the leading sector, adding 20 new unicorns alone

• Other sectors included fintech (14), cleantech and energy (12), and semiconductors (9)

• The U.S. and China produced the most new unicorns, with 41 and 24 startups respectively

• In 2023, 10 unicorns exited the board via an IPO, contrasting with 20 companies in 2022 and 113 in 2021. However, M&A was more active, with 16 unicorns companies been acquired in 2023, up from the 11 in 2022

Crypto venture funding climbs for first time in nearly 2 years after bitcoin’s stellar run (4 minute read)

Venture funding for crypto-related companies in the fourth quarter of 2023 totaled $1.9 billion, marking the first increase since the first quarter of 2022. This rebound is a welcome sign for crypto entrepreneurs who have faced challenges during the recent "crypto winter", influenced by major central banks rising interest rates and the collapse of major crypto companies

• With the recent increase in crypto asset prices and the strong performance of public crypto-related companies, investors confidence in the sector is returning

• In the past year, bitcoin has more than doubled in price and is now worth over $52,000 apiece

• Nonetheless, the number of deals declined 2.4% in Q4 2023, meaning that the strongest startups are the ones getting investments, concentrating both the capital and the market

• The launch of the first spot bitcoin exchange-traded funds (ETFs) in the U.S. has also sparked interest from financial institutions, leading to a wave of new investments in the crypto space

US VC Valuations report (40 minutes)

In 2023, the venture capital market saw pre-seed and seed-stage valuations remaining strong, near or above record highs, with median valuations at $5.7 million and $12 million, respectively,  despite market pricing slowdowns. Late-stage ventures faced challenges with depressed valuation multiples and lower capital supply, constraining dealmaking. In 2023, the annual median late-stage deal size fell to $5.9 million

• Exit opportunities remained challenging, with public listings experiencing difficulties and acquisitions becoming a more viable option for liquidity

• The median exit valuation for public listings in 2021 saw a YoY decline of roughly $117 million, reaching $110.6 million and marking the lowest annual median valuation observed in over a decade

• As for M&A transactions, the median acquisition valuations in 2023 increased by 25.1% compared to 2022

• Overall, the market was characterized by pricing pressure, reduced valuations, and a conservative approach among investors, with deal structure playing a significant role

INDUSTRY WORLDWIDE

Cash-Rich Venture Capital Firms Eye New Investments in Latin American Startups (5 minute read)

After largely waiting on the sidelines in 2023, some of the largest funds in LatAm are ready to make fresh investments, with nearly $4 billion ready to be deployed. Despite a decline in funding, investors are optimistic due to interest rate cuts in Latin America

• In January alone, the region’s startups raised $315.5 million in 63 investment rounds

• While investors are more cautious, in 2023 VC funds dedicated to LatAm raised $2 billion, a 40% increase from 2022

• Investors are looking at companies mostly in biotechnology, health care and financial services

• Overall, investors are focusing more on companies' revenue growth and path to profitability, indicating a healthier investment environment in the region

Global fund performance report (30 minute read)

In the year through Q2 2023, private market strategies diverged from long-term trends, with only real assets, mainly infrastructure, outperforming its 10-year average return. Venture capital struggled the most, declining 8.0% as it backtracked on 2021 valuation markups

• Venture Capital funds experienced negative returns for the fourth consecutive quarter, dropping 8.0% for the year. The decline in venture valuations was influenced by a slow exit environment and a lack of nontraditional venture investors, leading to a more conservative pricing environment

• Despite the challenges, larger funds outperformed smaller ones, likely due to their access to high-quality deals and diversified portfolios

• From a regional perspective, North American funds achieved near parity with European funds, with North America outperforming by 0.4%

🏦  ECONOMIC SNAPSHOT

Why US economy is powering ahead of Europe's (4 minute read)

The US has emerged as a strong performer among global economies, with a robust GDP growth rate of 3.3% in the fourth quarter of 2023, exceeding expectations. This growth is attributed to several factors, including substantial economic stimulus packages totaling $5 trillion, sustaining consumer spending despite inflation

• Despite high inflation, the strong jobs market has helped maintain disposable income and consumer spending, with the unemployment rate below 4% since February 2022

• The flexible labor market allowed companies to adapt to challenges, leading to a strong jobs market and rising real wages

• the US also benefits from energy independence, mitigating the impact of energy price shocks seen in Europe

Japan and the UK are in recessions. Is the US next? (3 minute read)

Japan and the UK have both entered technical recession. Japan's contraction is linked to its shrinking population, limiting growth potential, while the UK's drop in consumer spending led to its recession. In contrast, the US has seen robust GDP growth, supported by strong consumer spending and pandemic stimulus

• Despite concerns about a potential recession, the US economy's resilience, including a strong labor market  and household finances, suggests it is unlikely

• The US has experienced higher than expected GDP growth in recent quarters, driven by robust consumer spending supported by pandemic stimulus measures

• The possibility of a US recession in 2024 remains uncertain, with factors like the Federal Reserve's interest rate decisions and unforeseen economic shocks playing a role

A US productivity boom may explain how inflation slowed amid a strong economy (4 minute read)

Americans are on the brink of experiencing a significant economic event: inflation returning to normal without a recession, a.k.a. "soft landing." This progress may be attributed to a recent surge in productivity growth

• Strong productivity in the US last year allowed for substantial wage gains without significantly increasing consumer costs, as workers were producing enough in various industries and services to cover higher labor costs

• Productivity (goods and services produced per hour worked), increased by 2.7% in the fourth quarter of 2023 compared to the previous year, above the average increase over the past two decades

• Several factors may have contributed to this productivity growth: the use of generative artificial intelligence made certain tasks more efficient. Also, companies became more productive in anticipation of a recession that did not occur, leading to cost-cutting measures like layoffs

🧑🏿‍🤝‍🧑🏽 IMPACT & DIVERSITY

As DEI gets more divisive, companies are ditching their teams (5 minute read)

After the murder of George Floyd in 2020, companies made significant pledges about racial equity, hiring teams dedicated to diversity, equity, and inclusion (DEI). However, some companies are replacing internal DEI teams with DEI consultants, citing a shift toward embedding DEI values directly into their people programs rather than as separate initiatives

• Data from Revelio Labs shows that DEI jobs peaked in early 2023 before declining by 5% that year and shrinking by 8% so far in 2024

• Companies like Zoom, Snap, Meta, Tesla, DoorDash, Lyft, Home Depot, and X have made steep cuts to their DEI teams, with some slashing their size by 50% or more

• The retreat from DEI work coincides with State legislators introducing anti-DEI bills, and legal challenges to diversity practices at various companies and organizations, such as the ongoing lawsuit against Fearless Fund

Does DEI Still Matter? (5 minute read)

As some companies scale back or eliminate their diversity, equity, and inclusion (DEI) programs, executives might question the value of such initiatives. Despite the legal and political challenges, there are compelling reasons to prioritize DEI efforts:

• McKinsey's research shows that gender and ethnically diverse companies tend to outperform those with more homogenous workforces (though causation versus correlation remains debated)

• Hiring a diverse workforce can also improve a company's understanding of its customer base, leading to better products and services

• In the tech industry, where products are designed for global use, the lack of diversity among employees can lead to products that don't work for everyone, particularly regarding gender and race

• Fact: the share of disabled people in the US workforce’s post-pandemic growth stands at 32.2%

🚀 IPOs

VCs sacrifice future gains for cash amid IPO dry spell (4 minute read)

The current venture capital environment, experiencing its lowest distribution levels since the global financial crisis, is prompting early-stage investors to sell secondary stakes in their top portfolio companies to later-stage investors at significant discounts

• This shift reflects the industry's adaptation to a prolonged lack of IPOs and M&A activity

• Early investors are now selling larger portions of their stakes in successful startups at discounts of up to 60% compared to the new round's valuation, a departure from the past practice of holding for higher valuations. This trend is driven by a desire to realize returns sooner rather than later

• Despite some regrets from investors for not selling earlier, the focus now is on striking a balance between returning cash to LPs and achieving long-term gains

• There is a limited pool of growth-stage secondary buyers, leading some sellers to accept larger discounts to secure liquidity

🗞️ 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