2023: A Venture Capital Year in Review

DP:
Did quarter four end the year on a good note?

AW:
No, it sort of looked like an upside down hockey stick for the entire year. Went down quarter after quarter. Not a great sign going into 2024, but we'll talk about that in a little bit

DP:
 Why do you think it was a down year?

AW:
I think a lot of things happened. We had Silicon Valley Bank going under, but we still have a lot of uncertainty around interest rates. We still have valuations declining. We still have the geopolitical situation, wars in Ukraine, wars in Israel. It's a tough market around the globe, but I think things will get better. I'm being optimistic about the future.

DP:
Any glimmers of light, any sectors that are giving you hope?

AW:
I think the one that everyone is excited about, and I think it's going to drive activity in the next three to five years, is really the AI space. AI and machine learning are really driving the venture capital community right now. I think 20% of VC deals we're in AI or machine learning deals, and almost a third of the dollars were in ai. So it's a pretty active space right now. Not as active as ai, but I think health tech investing, biotech investing, cybersecurity deals, I think are also gathering a lot of attention.

DP:
So they think AI is the real deal. It's not a passing fad. They're doubling down and it's here to stay.

AW:
Absolutely.

DP:
Tell us about the IPO market. Any big names out there?

AW:
It really is quite dormant. In the fourth quarter of last year, there were only eight completed IPOs exit activity last year, including IPOs and sale to large public companies and sale to private companies was only 66 billion dollars. To put that a context, two years before 2021, there were almost 800 billion dollars of exits. So the IPO market has really slowed down considerably. There appears to be a big disconnect right now between the private company valuations and the public company valuations. Matter of fact, the largest IPOs of 2023 were done at values that were below the last private funding round. So if you were a VC investing in later stages of a successful IPO last year, because you invested so late, you probably were out of the money because the valuations at that point were already inflated. You mentioned Shein before. A lot of controversy surrounding that deal both here and in China regarding how that company deals with child labor laws, how that company deals with climate issues and environmental issues. Even though ethically it might not be the best company to go public, we need a shot in the arm like that here in the US. That's probably going to be about a hundred billion dollars deal if it happens. I'm not sure it will. There's still a tremendous controversy. The SECs looking at it here, the Chinese, no authorities are looking at it, so I'm not sure it's going to happen, but it would certainly be a shot in the arm for us if it did.

DP:
Any other whispers of IPOs out there?

AW:
Not to reveal any names, but I think that the statistic that we really have to keep our eye on there are 700 privately held unicorn companies right now, and any one of those could go public. If the market was different, it was a frothy market, you'd see a lot of IPO activity. So the fact is there's a lot of very valuable companies that would go public in a better IPO market. So I think that's the thing to keep track of.

DP:
And under the heading of more bad news, it sounds like startup bankruptcies are on the rise.

AW:
Well, I think it's as a result of valuations, were down last year. Valuations are probably down 15 to 20% in the last 18 months. And so as a result of that, companies that are fortunate enough to be able to go back to the well and raise additional rounds of venture capital are doing it as a result, doing it as down rounds. I think almost 30% of the deals in 2023 were down round deals. The other side of the coin is a lot of VCs are telling their portfolio companies to conserve cash, make it last longer. I think a lot of those companies that were not able to conserve cash and ran out of money had two options. One was to go out of business and liquidate or the other was to go bankrupt. Last year, the number of bankruptcies of VC-backed companies doubled in comparison to 2022. So bankruptcies is a real issue here in VC-backed companies.

DP:
What are you looking at in quarter one of 2024 that will give you an idea of how the rest of the year will shake out?

AW:
I'm optimistic about 2024, I'm going to be totally honest with you. In my mind, the glass is he full. And the reason why is first of all, there's 300 billion of dry powder in the hands of the venture capital community. It's got to be invested. It's got to be invested at some point, and there's a lot of great companies out there that are worthy of that money. The Fed is talking about a couple of interest rate reductions in 2024. All good news, large companies have kind of shied away from making acquisitions of venture backed companies. So there's probably a lot of pent up demand out there. So I think 2024 should be a really good year. And I'm not saying it's going to start off in the first quarter, but I think you're going to see an uptick in deal activity as we go through this year.

DP:
So if you see that uptick in deal activity in quarter one going into quarter two, that's telling it might be a bounce back year.

AW:
The floodgates could open. There's a lot of pent up demand. There's a lot of capital for this to be a successful year. And I think I'm looking for a good year in terms of dollars invested. I'm certainly looking for the exit community to get back to normal numbers. And I think also as we see exits and there's return of Capital Limited partners, you're going to see fundraising pickups.

DP:
Well, Alan, always a pleasure speaking with you.

AW:
Thanks Dave. I really enjoyed it.

DP:
And thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next podcast when we get down to business.