Out with the old, in with the new 🏦 💵

January 02, 2024

Week of January 2nd, 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

In 2023, funding for unicorn companies has significantly declined to approximately 25% of the 2021 peak, according to Crunchbase data. The investments by the nine most active global venture and growth investors in unicorn companies have also dropped considerably. These investors backed 44 unicorn companies in 2023, constituting 13% of all privately funded unicorns that year, compared to 213 companies (28%) in 2022 and 471 companies (30%) in 2021

  • Notably, growth investors like Tiger Global, Coatue, and the SoftBank Vision Fund, which had significantly increased their investment counts in 2021, are now experiencing a slowdown in 2024

  • Venture capital investors, including firms like Andreessen Horowitz and Sequoia Capital, are also facing challenges, adjusting the values of their portfolios and scaling back exit expectations

  • The unicorn landscape in 2024 is expected to witness a reduction in numbers due to closures, acquisitions, and potential public market entries, with some companies still able to raise funds at lower valuations

PitchBook analysts predict three trends for fundraising in 2024:

  1. US PE Continuation Funds: The use of continuation funds, which buy assets from older funds reaching the end of their life, is expected to surge in 2024. With around 100 exit transactions involving continuation funds predicted, these vehicles are seen as a response to low exit activity in the private equity sector. However, challenges like controversy and LP resistance may still persist

  2. US VC Fundraising Stagnation: The VC fundraising landscape in the US may not see significant growth in 2024. The slowdown in IPOs has impacted VC fund distributions, leading to a decade-low in Q3. The model estimates a slight increase in total fundraising similar to 2020 levels. This stagnation could put pressure on startups, affecting their access to capital

  3. Europe's Embrace of Large Funds: In Europe, the trend of larger PE funds dominating fundraising is expected to continue. Despite a record fundraising year in 2023, the concentration of capital in a few mega-funds is anticipated to increase. Similar dynamics are expected in the European VC space, with large funds likely to match or surpass 2023 levels, presenting buying opportunities for LPs amid a dip in startup valuations

In 2023, the venture-backed startup world faced challenges and significant events, despite hopes for a recovery from the tough year of 2022:

  1. Crypto Contagion: The year began with the implosion of crypto exchange FTX, leading to criminal charges against founder Sam Bankman-Fried. The crypto industry experienced contagion, resulting in bankruptcies and layoffs, although crypto prices steadily rose

  2. AI Boom: AI-related startups garnered significant attention and funding in 2023. Microsoft's reported $10 billion investment in OpenAI set the stage for a series of major funding rounds for AI startups, including Inflection AI, Anthropic, and Aleph Alpha, with involvement from large corporations and their VC arms

  3. Banking Crisis: Silicon Valley Bank, a crucial institution for venture-backed companies, faced a crisis in March, announcing the sale of $2.25 billion worth of stock. Concerns about the bank's liquidity led to a run on withdrawals, forcing startups like Rippling to raise funds urgently

  4. Tech Layoffs: A slowdown in venture investment resulted in layoffs across tech companies, both large and small. Around 190,000 workers were laid off in mass job cuts, affecting companies like Alphabet and startups such as Convoy and D2iQ

  5. IPO Market Reopening: The tech IPO market reopened in August after nearly two years, with companies like Arm Holdings and Instacart leading the way. Hopes are high for increased IPO activity in 2024, providing exit opportunities and liquidity for venture capitalists

  6. Altman Drama at OpenAI: In a surprising move, OpenAI co-founder and CEO Sam Altman was ousted due to communication issues with the board. A subsequent employee letter and pressure led to Altman's return as CEO after agreeing to revamp the board

These convictions highlight various cases of fraud, deception, and misconduct leading to legal consequences for prominent figures in the tech industry:

  1. Trevor Milton (Nikola): Founder of Nikola, sentenced to four years for securities fraud after being accused of defrauding investors

  2. Elizabeth Holmes (Theranos): Founder of Theranos, reported to jail for a 11-year sentence after the company dissolved due to revelations of fraudulent practices

  3. Ozy Media's Downfall: Executives at media startup Ozy Media, including CEO Carlos Watson, faced legal troubles after a phone call with bankers led to suspicions and a subsequent unraveling of the company

  4. Sam Bankman-Fried (FTX): FTX's founder, known as SBF, convicted of massive crypto fraud after the exchange's balance sheet was revealed to be faulty

  5. Joe Sullivan (Uber): Former Uber chief security officer convicted for obstructing an official proceeding and misprision of a felony related to a data breach cover-up

The startup landscape is filled with failures that don't always end in high-profile scandals or court cases. Most closures are less dramatic, often due to factors like bad timing, dwindling funding, or exhausted runways. According to a PitchBook survey, around 3,200 private venture-backed U.S. companies shut down in a year, collectively raising over $27 billion. Here's a summary of the startups that faced closures in 2023:

  1. Convoy (2015 - More than $1 billion raised): A digital freight broker that closed abruptly in October 2023, eight months after raising $260 million. Its assets were acquired by Flexport, with plans to restore trucking logistics services

  2. Daylight (2020 - $20 million raised): An LGBTQ+ banking platform that announced its shutdown in May 2023, facing legal issues and controversies, including a lawsuit and allegations of inappropriate behavior by the CEO

  3. Fuzzy (2016 - $80 million raised): A pet care telehealth startup that closed down suddenly in February. The site was taken down without warning, leaving executives and customers surprised

  4. IRL (2016 - $200 million raised): An event organizing social app that shut down in June 2023. Internal investigations revealed that around 95% of its 20 million active monthly users were bots

  5. Zume (2015 - $445 million raised): Initially known for pizza delivery robots, Zume pivoted multiple times, exploring non-pizza delivery trucks and sustainable food packaging. The company liquidated its assets in early June 2023

INDUSTRY WORLDWIDE

Asia can anticipate a slightly improved year for venture capital investments in 2024 after a challenging 2023. Startups in the Asia-Pacific region attracted 40% less funding from venture investors in 2023 compared to the previous year, totaling $86.5 billion. While optimism for 2024 is present, caution prevails due to uncertainties

  • The U.S.-China tensions have led some foreign VC investors to explore opportunities in other Asian markets, such as Japan, India, and Vietnam

  • Despite China's relative resilience, challenges in the IPO market and cautious investor sentiments are expected to persist in 2024, with a potential rebound in 2025

🏦  ECONOMIC SNAPSHOT

Despite concerns and elevated risks, the U.S. managed to avoid a recession in 2023, credited to good policies and a bit of luck. However, some economists argue that a recession in 2024 is still a possibility. Factors include the potential for unforeseen economic shocks, a drop in employment in certain sectors, and the risk associated with the Fed's current high interest rates

  • Kathy Bostjancic, chief economist at Nationwide Mutual, suggests a 65% chance of a mild recession in 2024, with a predicted rise in the unemployment rate

  • Other economists, like David Mericle from Goldman Sachs, believe in the potential for a soft landing, with a 15% chance of a recession in the next 12 months, citing improved inflation conditions and a balanced labor market

  • The outcome remains uncertain, with factors like inflation, interest rate decisions, and unforeseen shocks contributing to the complexity of predicting the economic landscape in 2024

In the wake of the Covid pandemic, a shift in investment trends is evident as the cheap money bubble bursts in 2024. The Federal Reserve's interest rate hike and persistent inflation have led to a drying up of funds for unsustainable businesses. Several high-profile startups, such as WeWork and Bird, filed for bankruptcy, while Covid-era successes like Hopin and Clubhouse faded

  • Despite the setbacks, investors remain excited about tech, with the Nasdaq Composite experiencing a significant rebound in 2023

  • The market correction prompts a focus on profit over growth, and venture capitalists predict the emergence of a new crop of well-run companies in 2024

  • Some founders, like Adam Neumann, are already making comebacks, raising funds for new ventures

  • The tech IPO window is expected to reopen in the second half of 2024, with companies adapting to the changed environment and an emphasis on profitability

🧑🏿‍🤝‍🧑🏽 IMPACT & DIVERSITY

The State of Women in Tech and Startups report by the nonprofit Women Who Tech highlights the limited progress in Diversity, Equity, and Inclusion (DEI) in the tech industry. Despite DEI commitments made after the MeToo movement sparked by Susan Fowler's revelations about sexual harassment at Uber in 2017, the report shows that 42% of women in tech have experienced harassment

  • The Gen Z workforce, the most racially diverse generation, finds fake allyship problematic, with 83% considering a company's commitment to diversity and inclusion when choosing an employer

  • While DEI budgets faced cuts in 2023, the report argues that actual capital investment, rather than performative actions, is necessary to drive progress

  • The lack of diversity in asset management, where 98.6% of $80 trillion under management in the U.S. is managed by white men, contributes to the limited funding for women-led and Black women-founded startups

  • Accountability and legislative measures, such as California's diversity reporting law for VC and private equity firms, are essential for fostering genuine inclusion in the tech industry

  • The Massachusetts House and Senate are also considering an Act Relative to Fair Investment Practices to promote investment in diverse-led startups and extend protections against workplace sexual harassment and gender discrimination in venture capital and investor relationships

🚀 IPOs

Following the notable IPOs of Arm, Klaviyo, and Instacart in September, optimism for a robust IPO market in 2024 has diminished. Despite Arm's success, Klaviyo and Instacart have experienced declines of 22% and 33%, respectively, from their IPO prices as of December 31, 2023, indicating challenges in the current market

  • Approximately 1,500 private companies with valuations of $1 billion or more are on The Crunchbase Unicorn Board. However, companies considering public listings face the dual challenge of demonstrating a path to profitability alongside revenue growth

  • The Bessemer Cloud Index shows a slowdown in cloud revenue growth, dropping from 37.5% in January 2022 to 18.9% by December 2023

  • Valuation revenue multiples also decreased, indicating a trend of depressed values. Starting at 13.4x in January 2022, revenue multiples declined to 5.7x in January 2023, recovering slightly to 7.2x by December 2023. This raises the bar for companies aiming for appropriate market caps in the public context

  • While the Nasdaq composite index is at its highest value in 18 months, the overall sentiment suggests a cautious approach to IPOs, with companies potentially looking towards 2025 for significant public offerings

🗞️ 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

Here's to a new year filled with hope, opportunities, and positive transformations! Welcome 2024, may it be a year of growth and joy for us all.

We want to express our heartfelt gratitude for your unwavering support and partnership throughout this incredible journey. Take pride in the impact your investments have had on shaping the future and fostering change.

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Happy reading,

AI8’s Research & Performance Team

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