The Venture Capital Drought 🏜️💰📉

April 09, 2024

Week of April 8th, 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. Obsidian Therapeutics (biotech): secured a $160.5 million Series C financing led by Wellington Management. Obsidian focuses on developing engineered cell and gene therapies, particularly its tumor-infiltrating lymphocyte program

  2. Flip (social media): raised $144 million in new funding led by Streamlined Ventures, valuing the company at over $1 billion. Flip's marketplace offers video reviews, with reviewers earning based on views and product sales, while Flip gets a commission

  3. Alterome Therapeutics (biotech): raised $132 million in a Series B round led by Goldman Sachs Alternatives. The company utilizes its Kraken machine learning platform for drug discovery, focusing on small molecule therapies targeting various oncogenic targets

  4. Diagonal Therapeutics (biotech): Based in Cambridge, Massachusetts, Diagonal Therapeutics raised $128 million in a Series A round co-led by BVF Partners and Atlas Venture. The company is focused on discovering and developing agonist antibodies to combat illness, with its lead program targeting hereditary hemorrhagic telangiectasia

  5. Aerospike (database): The Mountain View, California-based company closed a $109 million investment led by Sumeru Equity Partners. Aerospike will use the funding to meet the increasing demand for databases that can scale, driven by the rapid adoption of AI

INDUSTRY

Startups are hopeful that the gradual opening of an IPO window and potential interest rate cuts later this year will lead VCs to be less stringent with their capital. However, the fundraising environment for startups is unlikely to ease significantly soon due to challenges faced by VCs in raising capital themselves

  • In Q1 of 2024, U.S. VC funds raised only $9.3 billion, on track to end the year at just above $37 billion, the lowest since 2013 and a 54% decline from last year

  • Just like startups, VCs are finding it difficult to attract new capital from their LPs, such as endowments, foundations, and pension funds. The decline in IPO and M&A activity over the past few years has resulted in limited cash distributions to LPs from their VC fund investments

  • Brand-name firms will likely continue to raise funds, but with less capital to invest in startups compared to before. However, smaller and newer venture firms may struggle to attract new capital from LPs

  • Despite these challenges, there is still a significant amount of capital (dry powder) available for investment by VCs from previous funds. However, this amount will diminish unless LPs increase their investments

In the first quarter of 2024, global fintech funding decreased by 16% compared to the previous quarter, totaling $7.3 billion, the lowest since early 2017. Despite a 15% increase in equity deal making, average deal sizes were smaller

  • 904 investments were made in fintech startups during the quarter, with Monzo's $430 million financing being the largest

  • The U.S. led in funding, with $3.3 billion raised across 393 deals, followed by Europe with $2.2 billion raised across 203 deals

  • Comparatively, in the first quarter of 2023, $16 billion went into 1,271 fintech startups, indicating a 54.3% decrease this year

  • Only six new fintech unicorns were created in the first quarter of 2024

  • Overall venture funding increased by 11% to $58.4 billion in the first quarter of 2024, while the number of deals decreased by 7% to 6,238

The U.S. Commerce Department announced $6.6 billion in grants and up to $5 billion in loans for TSMC under the CHIPS and Science Act. This funding aims to boost U.S. semiconductor manufacturing amid geopolitical tensions and supply chain concerns, particularly with China

  • TSMC plans to expand its Arizona operations by adding a third fabrication plant to produce advanced 2-nanometer chips, marking significant U.S. investment

  • The initiative is part of a broader effort under the CHIPS Act, allocating $280 billion towards domestic chip research and production

  • TSMC's investment exceeds $65 billion, highlighting the largest direct investment by a foreign entity in a U.S. greenfield project, expected to create thousands of high-tech jobs

INDUSTRY WORLDWIDE

In Q1 2024, North American startup investors increased their funding, with venture funding for American and Canadian companies totaling $35.2 billion, a 14% gain from the previous quarter. Despite this sequential increase, investment levels remained below those of the previous year, especially in late-stage funding

  • While deal volume declined by 8% from the prior quarter and 34% from the previous year, the exit market showed some signs of life, with successful IPOs and notable acquisitions

  • Late-stage and technology growth rounds attracted $19 billion in Q1, with 265 reported rounds

  • Early-stage funding totaled $13.2 billion, surpassing the previous two quarters, with a slight decrease in round counts

  • Seed investment saw a decline of 14% from the prior quarter, with a total of $3 billion going into reported seed, pre-seed, and angel rounds

  • Despite some positive indicators, the data suggests that startup investment has not yet fully recovered to peak levels seen in previous years

🏦  ECONOMIC SNAPSHOT

Anti-immigrant activists have long argued that increased immigration harms the economy and job prospects for U.S. workers. However, recent data contradicts this argument, showing that immigration has positive effects on the economy and job market:

  • The Bureau of Labor Statistics reported that nonfarm employment increased by 303,000 in March 2024, and the unemployment rate remained around a historically low unemployment rate of 3.8%

  • Immigrants contribute to economic growth by increasing the labor supply, which helps to control inflation and raise real wages –how much money an individual or entity makes after adjusting for inflation– for U.S. workers

  • Research demonstrates that allowing more foreign-born scientists and engineers to work in the U.S. could result in job growth rates for U.S.-born workers in related industries increasing by up to 55%

As of the latest data, Bitcoin traded 4.2% higher at $72,195, surpassing the $71,000 level for the first time since mid-March. The digital currency has risen more than 140% in the last 12 months and hit a record high above $73,000 on March 13

  • Bitcoin's recent price surge can be attributed to several factors, including increased investor enthusiasm and inflows into crypto exchange-traded funds (ETFs)

  • The approval of the first spot Bitcoin ETFs by the U.S. Securities and Exchange Commission in January has allowed institutions and retail investors to gain exposure to Bitcoin without directly owning the asset

  • The upcoming Bitcoin "halving" (reduces the pace of Bitcoin creation used for validator rewards) on April 20 is expected to reduce supply and increase prices

  • Bitcoin's popularity has also positively impacted other digital currencies, with the total crypto market capitalization estimated at roughly $2.6 trillion at the beginning of the month

In the recent past, the rich world prepared for a challenging battle against inflation, but today, it appears to have subdued without major economic downturns. Despite inflation dropping from peaks of 5-8% to 3-5%, there are lingering effects

  • In the recent past, the rich world faced high inflation, but today it has receded without causing economic downturns. However, this apparent victory is not without costs

  • Central bankers were slow to respond to rising prices, and though inflation is now declining faster than expected, it remains above targets. Public awareness of inflation risks has increased, challenging central bank credibility

  • Policymakers must be agile, adjusting interest rates quickly to manage inflation volatility, much like their counterparts in emerging markets

The stock market has seen significant gains, with the S&P 500 reaching record highs on 22 days in just the first three months of the year. However, when accounting for inflation, the market has not actually reached new heights until recently

  • According to Robert J. Shiller, the Yale professor and Nobel laureate in economics, the inflation-adjusted S&P 500 is now close to or at a new peak

  • Despite the positive market performance, long-term investors should remain cautious as rallies in the stock market, especially when they outpace corporate earnings, historically precede downturns, Shiller suggests diversifying investments and adopting a long-term approach

  • Tech stocks like Nvidia have soared, but the stock market rally has been broad-based, with strong returns for various funds in the first quarter. On the other hand, bond funds faced challenges as interest rates rose

  • Overall, U.S. stocks saw gains of 8.7% for the quarter, while taxable bonds only eked out gains of 0.7%

🧑🏿‍🤝‍🧑🏽 IMPACT & DIVERSITY

Venture investment levels have decreased over the past two years, leading to fewer new companies reaching unicorn status, especially those founded by women

  • Only seven U.S. companies with female founders became unicorns in 2023 and 2024, a significant decline from the peak in 2021

  • Among the new female-founded unicorns are companies like Zum, Imbue, Ohmium, Metropolis, Replit, Adept AI, and Kindbody, with many of them leveraging artificial intelligence (AI) technology

  • AI is a popular core or enabling technology among these new unicorns, reflecting a broader trend in global unicorn creation

  • While the current pace of new female-founded unicorns is slow, it's expected to improve as venture funding rebounds from a weak period in recent years

In 2023, companies founded solely by women received only 2% of the total capital invested in venture-backed startups in the US. However, overall venture capital funding for female-founded or co-founded companies in the US has been increasing

  • Deal count:

    • Female founders only (7%)

    • Female & male founders (19.3%)

  • VC capital:

    • Female founders only (2.1%)

    • Female & male founders (23.8%)

  • Deal stage:

    • Angel/seed had a total of $29B of capital invested, with 17,817 deals

    • Early VC has a total of $95.4B in capital invested, with 11,460 deals

    • Later VC has a total of $169.5B, with 8,946 deals

  • Software is the industry with the biggest amount of capital invested ($80B) and Deal count (5,984)

🚀 IPOs

Q2 is proving promising for companies eyeing listings, buoyed by successful debuts like those of Astera Labs Inc. and Reddit Inc. Already, Microsoft Corp.-backed Rubrik Inc. and UL Solutions Inc. are expected to contribute over $1 billion to the $9.6 billion raised via US IPOs this year

  • Lauren Garcia Belmonte from Morgan Stanley notes investor eagerness for new businesses. However, market sentiment remains influenced by geopolitical factors, corporate earnings, interest rates, and the election

  • Keith Canton of JPMorgan Chase & Co. highlights investors' focus on companies with proven growth and clear paths to profitability: investors are scrutinizing deal size, float size relative to anchor investor absorption, and valuation multiples

🗞️ 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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