Did you know unicorn creation hit a 6-year low? 🦄

January 22, 2024

Week of January 22th, 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 the second week of the new year, significant fundraising activities marked various sectors:

  1. Quantinuum (Quantum): secured a substantial $300 million in equity funding, achieving a pre-money valuation of $5 billion. Quantum computing attracted increasing venture funding in 2023, reaching nearly $1.2 billion

  2. Flexport (Logistics): raised $260 million, with Shopify as a major investor. The San Francisco-based startup, valued at $8 billion two years ago, has raised nearly $2.4 billion from investors such as Andreessen Horowitz and the SoftBank Vision Fund

  3. Cleveland Diagnostics (Biotech): raised $75 million in a round led by Novo Holdings. Since its founding in 2013, the Cleveland-based biotech has raised a total of $111 million

  4. Comanche Biopharma (Biotech): secured $75 million in a Series B round led by New Enterprise Associates. The startup is dedicated to developing therapies for preeclampsia, a serious pregnancy complication affecting millions globally

  5. DailyPay (Fintech): raised $175 million, including $100 million in an expanded credit facility and over $75 million in equity financing, led by Carrick Capital Partners. The round valued the company at $1.75 billion, and since its inception in 2015, DailyPay has raised $1.2 billion

How has the unicorn landscape evolved  in the last decade since the publication of TechCrunch’s "Welcome to the Unicorn Club" in 2013? A report that covers data gathered from U.S.-based, VC-backed startups valued over $1 billion within 10 years. Here are the new key takeaways:

  • Unicorn Growth and Diversity:

    • The number of unicorns has surged 14 times, from 39 in 2013 to 532 in 2023, spanning 19 sectors

    • A significant shift towards enterprise, with 78% of unicorns focused on B2B, in contrast to 2013's consumer-oriented majority

    • The Bay Area remains a unicorn hub, but its dominance has decreased (69% in 2013 to 45% in 2023), while New York's share grew from 11% to 19%

  • Financial Trends:

    • Unicorns' total aggregate value reached a staggering $1.5 trillion in 2023, compared to $260 billion in 2013

    • The majority of unicorns (93%) are "papercorns" – privately valued and not yet liquid

  • Tech and Founding Trends:

    • AI is identified as a megatrend, with OpenAI anticipated to become the first AI superunicorn

    • Founders are more diverse in terms of educational and work backgrounds, but gender diversity remains low (14% with a female co-founder)

In 2023, the venture capital landscape faced significant challenges, impacting both investors and startups. The latest PitchBook-NVCA Venture Monitor highlights the effects of this challenging environment:

  • Crossover Investor Exodus:

    • Investors participating in both public and private markets, reduced their engagement in VC. They were involved in 1,046 U.S. VC rounds in 2023, marking a 50% decline from 2022

    • Factors such as higher interest rates, strong performance in public equities, and a lack of IPOs contributed to their decreased interest in startups

  • Impact on Unicorn Creation:

    • Reduced competition among investors led to pressure on valuations, resulting in a significant drop in the creation of new unicorn companies. In 2023, only 225 new unicorns emerged, the lowest number since 2019

    • AI and machine learning companies accounted for a record-high share (44.4%) of new unicorns

  • Valuation Trends:

    • Despite valuation pressure over the last two years, startup prices generally remained higher than in 2020 for most stages. An exception was the venture growth stage, where the median valuation fell by 64% from 2021 and dropped below 2019 levels to $143.5 million

  • VC Fundraising Challenges:

    • For the second consecutive year, VCs received more cash from limited partners (LPs) than they returned in distributions

    • LPs' cautious approach may result in a prolonged period of challenging fundraising, with potential implications for the interest in generalist investing and a growing appetite for specialized funds, especially in areas like AI

Venture funding related to the metaverse, virtual worlds, and augmented reality experienced a multiyear low in 2023, marked by a decline in support for consumer-focused startups in this space

  • Notably, there were no U.S. funding rounds of $100 million or more for consumer-facing virtual world companies in 2023

  • Sales of VR headsets and augmented reality glasses have reportedly dropped, and even heavily funded companies like Magic Leap have faced challenges

  • However, Apple's recent announcement of the Apple Vision Pro headset, emphasizing "spatial computing" and avoiding the term "metaverse," might signal a potential resurgence in interest and innovation in immersive digital environments. If successful, it might lead to increased funding for startups in this space, with a shift in branding from "metaverse" to terms like "spatial computing" and "immersive digital environments"

In 2023, the number of newly minted unicorns significantly declined, marking the lowest figure since 2017. Only 45 startups achieved unicorn status, an 87% drop from the peak of 344 new unicorns in 2021

  • The generative AI sector dominated this cohort, with 44% of new unicorns being AI and machine learning companies

  • Generative AI companies experienced substantial valuation increases throughout the year. For instance, Lambda's valuation jumped from $170 million at its Series B to $1.55 billion at its Series C in just 11 months

  • In contrast, industries outside of generative AI saw a slowdown in unicorn valuations, with many startups trading below $1 billion on the secondary market

  • The challenging M&A environment, founder resistance to recaps, and investor hesitancy to invest in down rounds may lead to more abrupt shutdowns in 2024

INDUSTRY WORLDWIDE

In 2023, Latin America experienced a significant decline in startup investment, marking the second consecutive year of contraction in venture capital funding for the region. The total investment in seed through growth stage rounds reached approximately $2.9 billion, indicating a steep 63% drop from 2022 and an 84% decline from the record-setting levels of 2021

  • The contraction reflects a broader trend of reduced investment globally, accompanied by a scarcity of exits, including limited IPOs and major acquisitions

  • Despite the overall downturn, Brazil saw notable funding rounds, including a $200 million Series B for QI Tech, a SĂŁo Paulo-based tech-enabled credit provider. In Mexico, financial services companies like Kapital and Albo secured substantial funding rounds, showcasing resilience in certain sectors

  • The most significant pullback in 2023 occurred in late-stage funding, primarily influenced by a lack of demand for IPOs, which consequently limited pre-IPO financing activities

  • In contrast, early-stage and seed dealmaking exhibited more resilience throughout the year. The fourth quarter, in particular, showed an improvement, with close to $520 million invested in at least 37 known rounds

🏦  ECONOMIC SNAPSHOT

The White House has announced the forgiveness of student loan debt for an additional 74,000 US borrowers, totaling nearly $5 billion. Many of these borrowers are public service workers, such as firefighters, nurses, and teachers, who qualify for debt forgiveness after 10 or more years of service

  • The total number of borrowers with forgiven student loans under President Joe Biden's program is now 3.7 million Americans

  • The current forgiveness program is a reduced version of the original plan, as Biden initially aimed to forgive $430 billion of federal student loans for nearly 40 million borrowers

  • This plan faced legal challenges, and the Biden administration later introduced a less ambitious program called Saving on a Valuable Education (Save), including an income-driven repayment plan and other measures to help borrowers

The US Federal Reserve is expected to hold interest rates steady for the fourth consecutive meeting on January 30-31. While policymakers have indicated they are ready to discuss broad parameters for lowering rates, there is no sign they plan to use the upcoming meeting to tee up a rate cut for March

  • The Fed is likely to delay rate reduction until May, according to economist Claudia Sahm, but could move quickly with potential 50-basis-point cuts in the second half of the year if inflation looks favorable

  • The Fed's decision will depend on upcoming data on inflation and GDP, and the central bank may face criticism on the campaign trail leading up to the November presidential election

Contrary to predictions, the US did not experience a recession in 2023, defying expectations of many economists. Full employment and robust consumer-driven GDP growth contributed to the economy's strength, giving the Federal Reserve more time to maintain higher interest rates and observe declining inflation

  • As the focus shifts from macroeconomic factors to corporate earnings and fundamentals, investors anticipate the Fed's decreased prominence. The market is expected to move towards a state of "normalcy," emphasizing company fundamentals over central bank intervention

  • Economists suggest a possible "soft landing" for the economy, with optimism that the Fed will ease off in the first quarter of 2024. This easing could be signaled by a quarter-point rate cut in March, contingent on inflation data continuing to moderate

  • There is also a potential broadening of market participation in 2024, including a shift to value stocks and small to mid-cap stocks. In the fixed-income space, a preference for corporate bonds, especially high yield, is suggested as rates are expected to fall

  • While international stocks remain relatively attractive, concerns about challenges in the Eurozone and the ongoing Ukraine war are noted. Emerging markets, excluding China, are considered as potential opportunities, especially in countries like India

The US Securities and Exchange Commission (SEC) approved on January 10th spot Bitcoin exchange-traded funds (ETFs), allowing mainstream investors, including pension funds and ordinary investors, to purchase them

  • Spot Bitcoin ETFs directly buy the cryptocurrency at its current price, making it easier for a new group of investors to enter the Bitcoin market without dealing with digital wallets or crypto exchanges

  • The approval is expected to bring billions of dollars into the Bitcoin market, with major financial companies entering the space

  • However, SEC Chairman Gary Gensler warned investors about the speculative and volatile nature of Bitcoin, citing its use in illicit activities

  • The decision is seen as a landmark for Bitcoin, indicating increased acceptance by traditional financial institutions, although some argue it goes against the decentralized principles originally envisioned for cryptocurrencies

  • Concerns include the rapid and unpredictable price changes, potential cybercrime risks, and environmental implications associated with Bitcoin mining

After the approval of spot bitcoin ETFs by US securities regulators, approximately $3 billion has flowed into these funds, coinciding with a 9% decline in bitcoin's spot price

  • A notable factor in this scenario is the conversion of Grayscale Bitcoin Trust (GBTC) into an ETF, allowing backers to reclaim around $28 billion worth of bitcoin held by GBTC

  • While industry practice suggests these redeemed bitcoins may be reallocated to cheaper ETFs, it's also possible that some GBTC shareholders are cashing out entirely

  • Analysts anticipate an overhang from previously trapped GBTC investors, potentially leading to further profit-taking and downward pressure on bitcoin prices

  • JPMorgan suggests that approximately $36 billion, excluding GBTC, could rotate into spot bitcoin ETFs if retail brokers and exchanges reduce fees, but the outcome remains uncertain

🧑🏿‍🤝‍🧑🏽 IMPACT & DIVERSITY

Venture capital (VC) funding for Black entrepreneurs in the US has experienced a decline since the peak following George Floyd’s murder in 2020. In 2023, Black founders in the US received only 0.48% of all venture dollars, totaling about $661 million out of $136 billion. This represents the lowest percentage in recent years

  • In 2021, Black-led venture funds, such as Reach Capital, Harlem Capital Partners, and MaC Venture Capital, announced record raises, each exceeding $100 million

  • Despite the record raises, Black startup entrepreneurs received only 1.3% of the $147 billion in VC invested in US startups in 2021. The trend continued into 2022, where Black founders raised about $2 billion out of $215.9 billion allocated, representing approximately 1%

  • In the first half of 2023, funding for Black founders dropped significantly to about $565 million out of $75 billion

🚀 IPOs

Reddit is actively moving forward with plans for an initial public offering (IPO) in March 2024, according to sources familiar with the matter. The San Francisco-based platform had initially considered an IPO for at least three years, having confidentially filed for a public offering in December 2021. However, the plans were postponed due to challenging business conditions in the following year

  • If Reddit proceeds with the IPO, it would be the first from a social media company since Pinterest in 2019

  • The move could potentially revive the IPO market, which experienced a slowdown, with only two major venture-backed startups—Instacart and Klaviyo—going public in 2023

  • Reddit plans to sell approximately 10% of its shares but has not yet set a target valuation for the IPO

  • The company, founded in 2005, has raised $1.3 billion and is valued at nearly $10 billion

In 2023, India experienced robust IPO activity, with over 200 companies going public on the Bombay Stock Exchange and the National Stock Exchange in Mumbai. The total IPO value was significantly higher than in 2022, with approximately $1.7 billion raised by PE and VC-backed companies and just over $4.1 billion raised overall

  • However, this total was slightly over half the amount raised in 2021, which reached a record $7.4 billion

  • Cello, a household consumer products company, had the largest VC-backed IPO in 2023, raising $228 million at a $1.7 billion valuation in November

  • The IPO momentum is expected to continue in 2024, with India projected to lead IPO activity in Asia

Shein, the fast fashion giant planning a US initial public offering (IPO), is facing regulatory scrutiny from Chinese authorities despite its efforts to distance itself from the country. Despite relocating its global headquarters to Singapore and not selling products in China, Shein is required to undergo scrutiny under new rules for companies seeking IPOs outside China

  • The review by the Cyberspace Administration of China (CAC) is examining Shein's data handling and sharing practices. The regulatory review could take months, potentially causing a delay in Shein's IPO

  • Despite potential delays, some analysts suggest that the review may be procedural and may not necessarily derail Shein's IPO plans

  • Shein is said to be targeting a $90B valuation

🗞️ AI8 VENTURES HIGHLIGHT

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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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