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| Hey Insiders, Today we are bringing you an extra analysis of why SPACs are inking deals with health companies and why valuations of generative AI startups are rising. 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 | | Nine health companies, primarily drug and medical device makers, have inked deals with special purpose acquisition companies (SPACs) to go public since the beginning of April. Mergers with health companies represent 40% of the overall SPAC deals announced in the period. The rising count of health companies merging with blank check entities indicates that some SPACs are opting to merge with target companies outside their areas of expertise to force a deal rather than return the capital to sponsors. Jay Ritter, a professor of finance at the University of Florida, shares a similar viewpoint adding, "As the deadline approaches, the sponsors are saying a deal is better than no deal, even if it's something where they don't have an obvious expertise in the industry." 
SPACs typically have two years to merge with a target company, failing which they must return cash to sponsors. Pitchbook's analysis from February 2023 shows that out of the 761 blank check entities listed in 2021, 467 could merge with target companies. Bloomberg estimates that 250 SPACs are nearing their liquidation date this year despite 70 SPAC mergers already announced so far. Biotech firm EnGene and heart attack prevention device maker Avertix Medical are the most recent companies to agree to merge with SPACs. Their respective SPACs signed the deal less than six weeks before their liquidation deadline. OceanTech Acquisitions I Corp. is set to merge with regenerative medicine company Regentis Biomaterials after its two initial deals fell through. The firm initially intended to merge with firms in the leisure marine and yachting industries. One of the main reasons why SPACs want to avoid liquidation is the high costs associated with setting up the ventures. Per Bloomberg, SPAC set-up costs totaled more than $1.5B last year. Several sponsors are wary of the risks associated with forcing a deal through. Hence, nearly 230 sponsors have opted to liquidate the venture rather than push a deal through. Between the start of December 2022 and the end of January 2023, nearly 100 SPACs already liquidated their ventures and returned cash to sponsors. The popularity of SPAC listings waned in recent times following the strict regulatory scrutiny measures imposed by the SEC. Additionally, the stock market performance of companies that went public via SPAC mergers has been lackluster, further denting investors' confidence in SPACs. In 2022, the De-SPAC Index, which measures the stock market performance of companies listed through a SPAC merger, slumped by 75%. The De-SPAC Index had dropped by 45% the year before. 
Due to the underwhelming performance of SPAC IPOs, SPAC investment levels have returned to pre-pandemic levels. 13 SPACs raised $1.5B from investors this year, with Ares Management raking in $500M from sponsors for its blank check entity Ares Acquisition Corp. II. By this year's end, funding for SPACs is expected to fall below $163B raised by 600 SPACs in 2021. |     | |
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| 2 | | 
Median pre-money valuations of early-stage generative AI startups increased by 16% this year compared to 2022, per Pitchbook. The increase in valuations for generative AI startups is in stark contrast to the valuation slump experienced by startups across all other sectors. Valuations of startups in all other sectors raising Series A or Series B rounds dropped by nearly 24%. 
Investors are primarily interested in companies in the generative AI field, not the whole AI sector. In Q1 2023, median pre-money valuations of generative AI startups doubled from 2022. On the other hand, valuations of growth-stage AI startups that were not involved in the generative AI field plunged in 2023, in line with all other sectors. Per CB Insights, despite the growth in generative AI deals, funding for the overall AI sector continued to slump in Q1 2023. Funding for global AI startups dropped 43% QoQ, whereas it dropped 27% QoQ for U.S.-based AI startups. Median late-stage deal sizes dropped to $25M in Q1, slumping below pre-pandemic levels. Index Ventures' partner Erin Price-Wright believes the current hype around generative AI startups is justified, as she believes that AI will be a core element of all software within the next 10 years. Per Pitchbook's report, the generative AI sector is poised to grow at a 32% CAGR to potentially become a $98.1B industry by 2026. Telstra Ventures' general partner Yash Patel estimates that generative AI startups in Series A stages are raising funds at a 5x revenue multiple over their annual recurring revenue (ARR). Most promising startups can raise funding at a 10x multiple. Felicis Ventures' general partner Sundeep Peechu believes that "general euphoria" about generative AI's potential is driving up the valuation of startups. As a result, Peechu says that some generative AI startups without any revenue can raise Series A rounds at valuations of above $250M. Rewind AI, a startup developing an AI-powered local search engine for Mac devices, secured funding at a $350M valuation led by NEA. The New York-based startup was only making a revenue of $700,000. Some investors were reportedly willing to give the startup a $1B valuation. Another AI startup, LangChain, raised funding at a $200M valuation led by Sequoia with "minimal" revenue. At the current valuations, Patel expects generative AI startups to demonstrate 300% yearly growth at the minimum. According to his estimates, a Series A startup with $1M in revenue deserves a pre-money valuation of $15M. Series A stage startups may struggle to raise subsequent rounds amidst the VC funding pullback as several startups will find it challenging to demonstrate revenue growth. However, generative AI startups may find it relatively easy to source funding, as they are being evaluated based on sheer potential rather than current revenue figures. | | | |
| 3 | | Today's Funding: - Cambridge, Massachusetts-based RNA medicines biotech startup ReNAgade Therapeutics raised $300M in Series A funding led by MPM BioImpact and F2 Ventures.
- British AI-powered mobile app development startup Builder.ai raised $250M in Series D funding led by Qatar Investment Authority, with participation from Iconiq Capital, Jungle Ventures, and Insight Partners.
- German healthcare startup Patient21 secured €100M ($107.7M) in Series C funding led by Pitango, with additional support from Bertelsmann Investments, Artian, Target Global, Piton Capital, PICO Venture Partners, and others.
- Industrial parts marketplace startup Volition secured $11M in seed funding co-led by Newark Venture Partners and Quiet Capital.
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- SoftBank is exploring providing debt or debt-like structured financing in order to provide portfolio firms with sufficient liquidity in the face of the challenging funding market.
- QED Investors has closed two funds totaling $925M. The funds include a $650M early-stage fund and a $275M early growth-stage fund.
- Indian VC firm increased the target size of its fourth fund from $450M to $525M. So far, it has secured commitments worth $518M and is on track to raise another $7M before its final close.
- British fintech-focused VC firm Anthemis Group has reportedly secured commitments worth $36.4M toward its new $200M third fund, per SEC filings seen by TechCrunch.
- Tiger Global has hired Evercore to liquidate holdings in portfolio startups in the secondary market.
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 | Analyst | | Karan Chafekar is a Management Consultant, Business enthusiast, and Licensed Pilot. | | This newsletter was edited by Aaron Crutchfield | |
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