Down-Rounds, Recaps and Difficult Decisions Continue – While many companies tried to avoid down-rounds and recapitalizations by cutting expenses and raising bridge convertible notes in hopes that the funding landscape would change back to more favorable company terms by the end of 2023, that shift does not appear to be coming anytime soon. In late 2023, venture debt lenders were less willing to refinance existing venture debt facilities without an influx of additional equity from existing or new investors. Investors could be making difficult decisions about which companies to fund and which companies to write-off and shut down or sell at a loss. Investors are likely to take a hard look at which companies have real viability versus companies that may just trudge along for a while and ultimately not gain significant traction. Even for companies deemed viable, down-rounds and recapitalizations with pay-to-play and pull-up mechanics, as well as warrant coverage, are in full swing and are likely to continue well into 2024. Have Capital, Will Pivot – After some companies raised record capital in 2021 and 2022 but their initial business plans/models did not pan out, many are sitting on a stockpile of cash without clear direction. Their answer? Keep the cash and pivot. Investors, on the other hand, may not be so inclined to allow companies to fundamentally shift their business plan while spending capital that was intended for a specific product or market. This could lead to spinouts and creation of new companies allowing investors to choose their path – roll the dice with a known management team while they pivot to a new business or ask for the remaining capital returned so it can be deployed in other portfolio companies. AI an Exception – Notwithstanding general headwinds impacting the venture community, start-ups touting advances in artificial intelligence and machine learning (AIML) experienced a banner year in 2023 after products like OpenAI’s ChatGPT and DALL-E, Google’s Gemini, and Midjourney’s eponymous image generator, among others, captured the public’s attention. According to data from PitchBook , AIML companies raised $21.4 billion in 324 transactions through the first three quarters of the year, up from $8.9 billion in 364 deals and $5.1 billion in 380 deals) in 2021 and 2022 respectively. However, the 2023 total includes massive rounds for OpenAI – $10 billion in Q1 – and Anthropic – $ 4 billion in Q3 – suggest a more modest uptick in the market overall. Several name-brand funds have launched AIML-specific funds, while other investors have specifically earmarked large percentages of their existing funds to investments in this space. Look for investments in AIML to continue to grow in 2024. Governance in the Spotlight – Over the last few years, several high-profile VC-backed companies have suffered public scrutiny when they hit a rough patch and unconventional governance structures (such as full founder Board control and super-voting rights) are exposed. Portfolio company governance has even become a topic of discussion with LPs at fund investor meetings and the sudden ouster and reinstatement of OpenAI’s Chief Executive Officer, Sam Altman, has brought governance considerations back to the forefront. Expect corporate governance matters to remain top of mind as founders and investors weigh typical venture capital growth economic models against other considerations (including “public benefit” considerations). IPO Momentum in 2024 – Late-stage, successful VC-backed companies are feeling significant pressure from early investors to achieve liquidity. Hopefully with a better economic outlook — interest rates easing since the Federal Reserve Bank is forecasting three rate cuts in 2024, continued job growth, and cooling inflation — there could be a number of high-profile IPOs for unicorns and others that weathered the storm and have been sitting on the sidelines for the past two years. An IPO exit would be more attractive for these companies, given concern about future M&A exit activity after Adobe’s $20 billion deal to buy Figma was called off, which would have represented the largest ever acquisition of a venture-backed company, according to PitchBook data, and Illumina announced plans to unwind their $7.1 billion acquisition of Grail. Both deals faced regulatory roadblocks.
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