| |
| Hey Insiders, Today we are bringing you an extra analysis of how down rounds are steadily increasing as valuations of U.S. startups slump and the impact of President Biden's impending executive order on U.S. funding in Chinese startups. Scroll down for some quick hits, then let us know if you'd like to see more in future issues! Karan
p/karan-chafekar | |
| 1 | | 
Down rounds accounted for 7.5% of all funding rounds in the U.S. Q1 2023, 5.7% higher than Q1 2022, per Pitchbook's latest U.S. Valuations report. Startups that previously delayed their fundraising in hopes that the VC deployment and valuation would show a recovery will enter the market soon for fresh funds. Pitchbook called the current environment "the calm before the storm" as several startups will have to forego their previous inflated valuations and settle for down rounds. Based on the trend and the current macroeconomic conditions, the number of startups raising down rounds is expected to increase later in the year. Startups could tap into venture debt or achieve sufficient positive cash flow to weather the economic downturn. VC investments into startups are closely linked to exit options. Due to an exit options crunch — from frozen IPO markets and lesser-than-expected M&A transactions — Q1 2023 recorded only 20 exits, eight of which were IPOs. Investors expect the IPO market to open up later this year or the beginning of 2024. Several startups are lining up their IPO plans and hope to list as soon as investors demand returns. Due to the lack of exit options, non-traditional investors (NTI) have curbed their VC investments, further intensifying the VC investment pullback, resulting in down rounds for startups. The pullback is most visible across late-stage investments causing median late-stage pre-money valuations of VC deals with NTI participation to drop from $92.5M in 2022 to $75.5M in Q1 2023. Within NTIs, corporate VCs (CVC) have continued their earlier pace of investments, especially into early-stage startups, as they often invest due to strategic factors rather than financial returns. Hence, CVC deals are rarely affected by volatile market conditions. 
Seed-stage startups have avoided valuation plunges as several investors have shifted their focus from late-stage investments to early stages. Pre-money valuations of seed-stage startups have defied the downturn, rising 16.9% QoQ and 28.6% YoY to $12.9M in Q1 2023. Despite the increase, VCs are only writing checks in startups with strong business fundamentals, long cash runways, and robust cash preservation strategies. Meanwhile, pre-money valuations of early-stage, late-stage, and growth-stage startups continued to slide. Pre-money valuations of early-stage startups reached $38.2M in Q1 2023, dropping 5.7% QoQ and 63.1% YoY. Pre-money valuations of late-stage startups fell to $55M, dropping 8.3% from the previous quarter. The capital-demand-to-supply ratio for late-stage startups widened to 3.24x, implying that there is demand for $3.24 by late-stage startups for every dollar available. The VC funding deal terms have tilted in favor of investors in Q1 2023, making it the most "investor-friendly" market in the past 10 years. Pitchbook anticipates that structured equity deals will strongly favor investors given the ongoing economic volatility. Data shows that there was an increase in the downside protections for investors. Additionally, investors are securing cumulative dividends for the past three quarters, giving them accrued dividend payments. In Q1, cumulative dividends accounted for 26.3% of all dividends, per Pitchbook. |     | |
| A message from our sponsor, ATAKAMA. |  | | Which tech investment opportunity is making waves in the $2T cybersecurity market?
Over 5,000 investors have already claimed their piece of a growing cybersecurity technology company that is solving the data privacy and protection problem.
The rise of cybercrime has highlighted the need for innovative solutions to protect our most valuable information. This is where Atakama comes in. Atakama is a patented, cutting-edge data security platform that utilizes advanced encryption technology to protect sensitive data against a data breach. As the demand for safeguarding sensitive, proprietary and private data accelerates, Atakama's is well-positioned to capitalize on this trend. Investing in Atakama is an opportunity to be part of a growing industry and a company with a unique and effective solution to a critical problem. With a strong team, impressive customer portfolio, and innovative technology, Atakama is well-positioned for success in the years to come. Learn More | |
|
| 2 | | 
U.S.-based investors have reduced their investments in Chinese startups to the lowest levels in recent years due to rising political headwinds. In Q1 2023, U.S. investors backed 17 Chinese startups. At this rate, Crunchbase estimates that U.S. investors will complete fewer than 150 deals by the end of this year. Due to rising political headwinds, the deal count had already dipped to 283 deals in 2022 from 426 in 2021. 2019 and 2020 saw over 300 deals each. 
Last month, President Joe Biden confirmed that he would be signing an executive order limiting investments in critical sectors in China in the next few weeks, likely around the time of the G7 summit, which is scheduled to start on May 19 in Japan. The executive order is aimed at reducing U.S. investment in Chinese high-tech industries, such as AI, semiconductor, and quantum computing startups. The U.S. cited national security concerns as the reason behind the move. At the end of 2021, cumulative U.S. investment into China was worth $120B. Investors have shrugged off the move, saying that the investors have already curbed their investments in China after the ban on the export of key American technology to China and the tariffs imposed on Chinese imports. Besides the upcoming executive order, investors have cited the rising political tensions between the two nations, China's regulatory clampdown on tech startups, and doubts over the listing potential of Chinese startups in U.S.-based stock exchanges as the reason behind the retrenchment. Some limited partners in funds have also shown concern about the environmental, social, and governance sectors, an unnamed investor told Crunchbase. Investors had already curbed their investments before the executive order was announced. Menlo Park, California-based VC firm GGV Capital has backed only two Chinese startups this year, down from over two dozen last year. Since 2019, the firm has backed 133 Chinese startups. BlueRun Ventures, formerly known as Nokia VC, has not invested in a single Chinese company this year. The firm has made 71 investments to date, 19 of which were inked in the last year. Early-stage VC firm GSR Ventures and sports tech VC firm GL Ventures have backed 13 and 11 Chinese firms, respectively, over the previous 16 months. Over the past three years, GSR and GL had invested in 60 and 62 startups, respectively. SOSV and OrbiMed have a combined one investment this year. In the past four years, both have inked 40+ investments each. While Sequoia Capital has a separate arm to invest in Chinese startups called Sequoia Capital China, both entities have a profit-sharing agreement. The impact of the upcoming executive order on that link remains to be seen. In January earlier this year, the firm hired national security advisor Beacon Global Strategies to assess the impact of the impending restrictions on their tech investments. Sequoia Capital China has backed 19 Chinese startups this year, taking its total count of investments in the nation to over 400. The pullback of funding from U.S.-based investors has impacted the VC funding in the nation, resulting in a 38% YoY drop in funding to $8.1B in Q1 2023, its lowest total in years. Last year, funding declined 47% from $87B in 2021 to $46.3B. | | | |
| |
| 4 | | Quick Hits: - Mark Cuban-backed Collars & Co. changes the menswear game with lightweight, 4-way stretch polos and dress shirts. Use code INSIDE for 15% off your first order.*
- SoftBank founder and CEO Masayoshi Son personally owes the Japanese conglomerate $5.2B for side deals he set up to boost his earnings. Son holds a 17.25% stake each in unlisted holding investment vehicles set up under Vision Fund 2 and the Latin American Fund. Additionally, he holds a 33% in the firm's stocks and derivatives vehicles SB Northstar.
- Crypto exchange Binance's VC arm Binance Labs assets under management reached $9B at the end of Q1 2023, up from its last reported value of $7.5B from last August 2022.
- Israeli VC firm Catalyst Funds closed its fourth fund at $150M. The fund aims to back cybersecurity, life sciences, deeptech, mobility, climate tech, food tech, and renewable energy startups.
- AI-powered VC firm Vela Partners emerged from stealth. The firm has backed 32 startups to date and has $25M worth of assets under management.
- Louisa, an AI-powered networking platform for employees, spun out of Goldman Sachs' internal incubator.
- Axios Pro delivers smarter, faster news and analysis for your industry, designed to make you a better decision-maker. Start your free trial now.*
*This is sponsored content. | | | |
| A message from our sponsor, PUBLIC.COM. |  | | Lock in a 5% Yield on Your Cash in Less than 30 Seconds Treasury Accounts are officially live on Public, offering a new way to lock in a 5.0% yield on your cash in literally seconds. (That’s significantly higher than a high-yield savings account.) It’s easy to get started. Once you create your Treasury Account, you can move your cash into the safety of US Treasury bills.
As a Public member, you can now instantly invest your cash in 26-week Treasury bills. Here are the steps: - At the time of your deposit, you lock a fixed rate of return, backed by the full faith and credit of the US government.
- Public then stores your Treasury bills at The Bank of New York Mellon—the world's largest custodian bank and securities services company.
- Once your Treasury bills reach maturity, they are automatically reinvested, so you have one less thing to think about.
- However, you also have the option to sell your Treasury bills at any time—even before they reach maturity. So, it's the best of both worlds: the high yield of US Treasuries and the flexibility of a savings account.
Join Public | |
|
| Upcoming Events | | MAY
17 | | Monthly Meditation guided by Nicholas Whitaker | | | | | | | MAY
23 | | Advance your security program and win more deals by joining this Vanta webinar | | | | | | | MAY
25 | | Inside.com Book Club - Zero To One by Peter Thiel | | | | | | * This is a sponsored event | | | |
Term of the Day Economies of scale : Economies of scale are the financial benefits that businesses experience when their production costs fall as their output volume rises. Question of the Week How do you approach networking, and what advice can you give others looking to build their professional connections? Join the conversation |
INSIDE VENTURE CAPITAL LEADERBOARD (7 DAYS) |
 | Analyst | | Karan Chafekar is a Management Consultant, Business enthusiast, and Licensed Pilot. | | This newsletter was edited by Aaron Crutchfield | |
| |
| |
|
| |
|
| |
Comments
Post a Comment