IPOs: Is down the new up? 📈🦄

March 20, 2024

Week of March 20th, 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. Applied Intuition (autonomous vehicles): raised $250 million in a Series E, valuing the company at $6 billion. The startup develops software for autonomous vehicles and other industries, leveraging generative AI to create driver-assistance systems and automated driving solutions

  2. Luminary Cloud (software): secured $115 million for its computer-aided engineering SaaS platform, targeting industries like aerospace, automotive, and industrial equipment

  3. Zephyr AI (biotech): closed a $111 million Series A, bringing AI to healthcare with a focus on oncology and cardiometabolic disease

  4. Together (AI): raised $106 million, doubling its valuation to $1.25 billion. The company offers a cloud platform for developers to build on open and custom AI models

  5. Nozomi Networks (cybersecurity): received $100 million in a Series E for its industrial cybersecurity platform, addressing operational technology (OT) and IoT security

In February 2024, ten new unicorns joined the global market, contributing over $18 billion in value to The Crunchbase Unicorn Board. Here's a closer look at some of the notable additions:

  • AI: Moonshot AI raised a Series B of $1 billion, valuing the company at $2.5 billion. Lambda, a cloud-based GPU company, raised $320 million in its Series C, valuing it at $1.5 billion

  • Security: NinjaOne raised a $232 million Series C, valuing it at $1.9 billion. Bugcrowd raised a $102 million Series E, valuing it at $1 billion.

  • Fintech: Pennylane raised a Series C of $43 million, valuing it at $1.1 billion. DataSnipper raised a Series B of $100 million, valuing it at $1 billion

Investors' enthusiasm for AI is evident in the record venture funding exceeding $50 billion last year. M&A are the most common exit path for AI startups, but despite the high expectations, M&A dealmaking in the AI sector declined by 31% in 2023 compared to the previous year

  • In 2022, M&A activity hit its slowest pace since the first quarter of 2019, with only 39 deals announced in Q4

  • While 2024 has seen an uptick in dealmaking, no significant transactions have been announced yet

  • Investors are cautious about the high valuations AI startups are commanding, which could make it challenging to achieve significant returns

In 2023, VC-backed startups faced challenges in hiring and compensation due to bear-market headwinds. The year marked a contraction in startup employment, with more job departures than new hires for the first time in at least five years.

  • Although startups continued to hire, their priorities shifted, with a focus on engineering, sales, and operations roles

  • Compensation strategies also changed, with average salary levels increasing for entry-level workers and C-suite leaders, while new managers and VPs saw declines

  • Salary benchmarks rose slightly between September 2023 and January 2024, with increases seen in most job functions. However, equity benchmarks suffered larger impacts than salaries, with average equity packages shrinking by over a third from November 2022

🏦  ECONOMIC SNAPSHOT

The current economic situation in the USA has baffled many economists, as the economy remains strong despite the Fed maintaining high interest rates. Typically, when the Fed raises rates to combat high inflation, it increases the risk of a recession. However, this has not occurred in the current economic climate. Several factors have contributed to the resilience of the economy:

  • The ultra-low mortgage rates that homeowners locked in during the pandemic when the Fed slashed rates and  a strong job marke with employers competing for workers by offering higher wages and better benefits

  • All these factors combined with robust household balance sheets, has helped mitigate the impact of high interest rates on the economy

  • Overall, the current economic situation in the US is characterized by strong consumer finances and a resilient job market, which have helped offset the effects of high interest rates

In 2023, the U.S. Federal Reserve has maintained its interest rates unchanged since July 2022, with all forecasts indicating no rate changes at the upcoming meeting. Despite persistent inflation, the likelihood of rate cuts has diminished, leading to a less aggressive rate-cutting policy than previously expected

  • The current interest rate is at 5.25%-5.5%, its highest level in 23 years

  • The Federal Open Market Committee (FOMC) members discuss the appropriate monetary policy to meet the dual mandate of promoting maximum employment while keeping prices stable

  • FOMC predictions suggested a 0.75-point rate cut in 2023, to 4.625%. However, Powell has ruled out imminent cuts due to the strong labor market and inflation not meeting the 2% target

  • Powell has stated he’s not in a hurry to make decisions, causing most investors to look forward to the June meeting for potential changes in monetary policy

🧑🏿‍🤝‍🧑🏽 DIVERSITY

In 2023, female entrepreneurs secured a record-high 27.8% of the total VC deal value, a significant increase from the previous year's 18.7%. However, exit activity for female-founded companies in the U.S. saw a considerable decline, dropping by more than one-third since 2022 to its lowest level since 2016

  • The representation of female decision-makers within venture firms experienced modest growth, reaching 17.4% for firms managing assets under management of at least $50 million, compared to 16.1% in 2022

  • Angel investment faced setbacks as many female angel investors took a step back in 2023, with a participation totaling $1.2 billion, down from $3.7 billion in 2022

  • Despite these challenges, the cumulative number of female-founded unicorns increased by 4.7% in 2023, with more than 100 companies contributing to this growth

Women in Alternatives 2024 (10 minute read)

Preqin’s Women in Alternatives 2024 report provides an overview of the representation of women in the alternative assets workplace, highlighting progress made and areas for improvement. Factors driving momentum for women in the workplace include the increasing number of women with bachelor's degrees or higher and client demand for more diverse investment firms. Here are some key points on the report:

  • Investors are leading the way in promoting gender diversity (+40% of female representation in foundations), but fewer than 10% of GPs worldwide have adopted formal diversity, equity, and inclusion (DEI) policies

  • 21.8% of people working in alternative assets are women

  • 25.3% of employees working for institutional investors are women

  • 14.7% of senior job titles in alternative assets are held by women

Artificial General Intelligence (AGI), a.k.a. “Human-level AI” represents a significant advancement in AI, capable of performing a wide range of cognitive tasks at or above human levels At Nvidia's GTC developer conference, CEO Jensen Huang addressed concerns surrounding AGI's implications, including its unpredictability and the existential questions it raises about humanity's control

  • There’s concern that once AGI reaches a certain level of autonomy and capability, it might become impossible to contain or control, leading to scenarios where its actions cannot be predicted or reversed

  • Huang noted that predicting when AGI will be achieved depends on how it's defined, suggesting a timeframe of within 5 years for specific, well-defined tests such as legal bar exams, logic tests, economic test, etc

  • As for the issue of AI "hallucinations," the CEO suggests that fact-checking and using multiple sources for critical answers are crucial and retrieval-augmented generation approaches

🚀 IPOs

The IPO market, despite expectations, has been slow to open in 2024, with very few major IPOs completed or in the works. This delay is attributed to various factors such as high interest rates, depressed valuations from their highs in 2021, and some big names like Databricks, Stripe, and Plaid delaying their IPO plans

  • However, investors are finding liquidity in secondary markets, where private companies authorize their shareholders to sell a limited amount of stock to approved investors. This allows companies to provide liquidity to their investors without having to hold a premature exit event

  • Secondary markets have seen significant growth, with transactions rising from $35 billion in 2017 to an expected $138 billion in 2023

  • Companies like Stripe have utilized secondary sales to provide liquidity to employees, while maintaining their valuation and avoiding a premature IPO

When Reddit list this week it's expected to be valued at up to $6.4 billion, down from its $10 billion valuation in 2021. This "down round" IPO reflects a shift towards rationality in venture capital, as many late-stage companies face cash shortages and investors seek returns

  • Despite the valuation cuts, these IPOs are not seen negatively in Silicon Valley but rather as a necessary correction

  • The record $345 billion U.S. venture investment in 2021 led to inflated valuations, and now companies are running out of cash

  • When going public, founders are being advised to accept lower valuations to establish a new stock price floor, potentially encouraging other companies to do the same

  • The shift to lower valuations could have painful consequences for late-stage investors who fueled the 2021 start-up bubble: many companies that should have been shut down or sold managed to delay reckoning, and a valuation cut might be a better outcome for them

The IPO window has been slow to open in 2024, with very few major IPOs completed or in the works. One factor contributing to this delay is that many standard VC deal terms give investors the ability to block an IPO if they don't think the timing or price is right

  • While it's relatively uncommon for investors to have direct participation to block an IPO, table stakes deal terms often allow investors with preferred shares to effectively do the same

  • The public markets have also changed, with investors now focusing more on profitability and margins rather than just growth metrics

  • This shift, along with the rise of secondary markets where private shareholders can sell stock, is giving VCs more options for liquidity without pressuring their startups to go public prematurely

🗞️ 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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