In the World of Wild Venture. May 2024
A monthly guide to the world of venture investments news
In the May edition, we talk about AI (can’t miss it), early-stage deals in Europe, current multiples in venture capital, space tech, and dual-use startups, and where VC funds fundraise capital.
Top Stories
Where do European VC funds get their money?
Sifted reports that European venture capital funds raised around €14 billion in 2023, citing Invest Europe. This is the lowest figure since 2018. By comparison, the previous year's figure was €24.5bn. Interestingly, the main filler of VC funds was government agencies — 37%! This is followed by family offices, private individuals, and corporate investors.
Surprisingly, even institutional investors, such as the EIF, made the list. The increased attention of institutional investors to the venture industry is also confirmed by PitchBook. For context, institutional folks are known to avoid VC as much as possible.
Another intriguing detail: according to the Sifted reporter, currently European VCs are actively looking for LPs in Dubai. Local sources say the interest is mutual. And if you want to make a special impression, tell them you're investing in Africa. Take note when you raise a new fund.
What are the multipliers these days?
Dealroom analysed the multiples and exits of several thousand venture capital funds around the world. It turns out that the median multiples by stage are highest for Series A and Seed. However, Seed has the highest maximum possible at 191x! Series A, which follows, has 135x, and the late stages have a multiple of 50x.
By industry, the best multiples are found in SaaS, marketplaces, and e-commerce.
The general rule is to invest in the early stages, as there is virtually no cap on growth.
Speaking of exits, the bigger the deal, the higher the multiple and vice versa. Recruitment, Hosting, Energy, Robotics, Security, Legal, Enterprise Software and Fintech are also the industries with the highest number of cash-outs.
The worst-performing industries are Fashion, Home Living, Sports, Telecom, Food, Space, Wellness Beauty, Travel and Gaming.
April early-stage deals in Europe
As per Sifted, European early-stage startups raised €1.4 billion in April, the same amount as the previous months. Interestingly, while the volume of investment remained the same, the number of deals fell sharply (312 in April versus 381 in March). The UK, France and Germany remain the regional leaders.
The most popular sectors are B2B SaaS, climate tech and health tech. There has also been a surge in energy investment, particularly in fusion. The authors also note good momentum in drug discovery and biotech.
AI is everywhere. Now it's in the venture capital funds themselves
The Data-Driven VC examination says that 66% of polled venture capital funds are already using LLMs for deal sourcing, screening and due diligence. Funds are hiring in-house engineers, which are becoming an integral part of the modern venture capital investment process.
Data-driven funds are nothing new, but it will be interesting to see how the AI thing performs compared to those who do things the old-fashioned way.
Industries
Investment in AI according to Dealroom
Dealroom presented a report on global AI investments. They predict that in 2024, investors will spend about $65 billion on AI projects. Less than half of this will go to generative AI.
There are four layers in the generative AI industry: applications, operational, foundational, and computing. Most startups are in the application layer, but the foundational one gets the most money. However, the compute layer makes the most money, accounting for 90% of all revenue in the generative AI industry.
If you come across AI startups, pay attention to the market for which they are developing a product. The most money-making areas are Industry ($25 trillion), Healthcare ($8 trillion), Mobility ($5 trillion), Defence ($2.5 trillion), Energy ($2 trillion), Compute ($600 billion), Software Cloud ($600 billion), Online Ads ($600 billion), and Mobile Devices ($400 billion).
AI companies are overvalued, investors say
Demand from LPs and funds for AI startups is so high, that it's scaring them. In the first quarter of 2024, the median valuation of early-stage companies was $70 million, far higher than any other vertical.
This is an unhealthy trend, as evidenced by the high number of flat and down rounds. Both investors and startups are abusing the hype, which means we are almost certain to see headlines about broken dreams and business failures soon. In addition, the abnormally high valuations make it hard to know which companies are good and which are not.
LLM protection — an open field for startups
Businesses are actively seeking solutions to protect their LLMs from cyber threats. According to CB Insights, this niche is virtually unfilled and there is a shortage of startups. Only 23 deals were recorded last year, but they were worth $213 million. Among the challenges facing LLMs:
Data poisoning. Corrupting or modifying training data to compromise the model;
Jailbreaking. Tricking the LLM into producing malicious outputs that bypass safety protocols;
Prompt injection. Manipulating the input prompt to override the LLM's original instructions.
Defence tech continues to captivate investors
But so far it has had little effect, says Sifted. Venture funds are well aware of the defence industry, which has received much attention because of the war in Ukraine. But it's not so easy to invest in them, and it's not a question of morality, but of agreements already signed with LPs.
Usually, such agreements specify the areas in which investments cannot be made. The first of these is arms. For the time being, therefore, the funds are limited to dual-use projects.
The situation with military tech should improve when the current agreements with the LPs expire and the funds come under new conditions, as re-signing is considered shameful. However, there has been a change of attitude indeed.
European space tech can't take off
Space tech in Europe has been around since 2016 and has long been a romanticised but underinvested industry, reports Sifted. The reason for this is its extremely high capital intensity. Although stars have become much cheaper since then, startups still have no place here, and neither do venture investors.
Even if a startup miraculously manages to raise money, the problem of finding customers remains unresolved. Space technology, like the military, for example, is heavily tied to government contracts, of which there are not many in Europe. At least not yet.
For the region, the space industry is political and an attempt to catch up with the US. Investors, on the other hand, are interested in commercialising products.
Meanwhile, there is some positive news. First, unlike the US, the European space industry does not have a monopoly. Secondly, governments' concern about the space race and the forthcoming injection of large sums of money could help the lucky ones get off the ground.
The authors also point out that space tech is heavily linked to the dual-use and defence area, which means that the potential of the industry may exceed expectations.
Crypto is back? I don’t think so
PitchBook analysts see a surge in LPs' interest in funds investing in early-stage tokens, liquid tokens and startup equity in 2024. This is due to the rise of Bitcoin and the SEC's approval of its ETFs.
To put this in perspective, funds raised more than $2 billion in the first three months of this year, compared to $1.9 billion for all of 2023. But it's worth remembering that in 2022, for example, the figure was $28.4bn! We're still a long way from the peak.
At the same time, funds confirm that attracting LPs is a very difficult and creaky business. Many have been burned by crypto investments and are sceptical, if not hostile. The industry remains volatile and risky.
Non-VC-related, but informative and even funny
A new study concludes that diversity and inclusion are positive but insubstantial for business performance.
AI chatbots could help tackle the global epidemic of loneliness, The Verge reports.
2024 Annual Marketing Report from Nielsen.
As per Windpower Monthly, renewables generated 30% of electricity worldwide last year and continue to grow.
The search for extraterrestrial life has evolved from an amateur pastime into a serious scientific field, says Aeon.
An up-to-date visualisation of black holes from NASA.
The 100 best albums of all time, according to Apple.
The global birth rate is at its lowest level ever, The Wall Street Journal reports.
Useful Data, that can come in handy
A survey by Sifted found that 71% of founders are dissatisfied with investor relations. In addition, 76% claim that investors have hurt their mental health! The whole reason is that VCs want to see returns. Unexpected for sure.
According to the annual conference of the European Business Angels Network (EBAN), there are currently around 40,000 angels in Europe, and their number is growing every year. The main focus of emergent investors: B2B SaaS, Fintech, AI, and defence tech.
According to Ramp, corporate spending on AI-related products soared 293% in 2023.
Insurance companies providing services to space operations suffered nearly $1bn in losses in 2023.
PitchBook predicts that venture capital funds will struggle with fundraising through 2028.
Some states are banning the use of artificially grown meat, Vox reports. This could hit food tech startups badly.
Y Combinator stats: focus on AI and SaaS.
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