In the World of Wild Venture. Q1 2024 Global Overview
Data to help you (and me) get up to speed after a long break
Hi to all subscribers. The last time this column appeared was last summer. Much has happened in the venture world in that time, but it would be a waste of energy to go back to news from many months ago. So we decided to start with a clean slate: the first quarter of the current year. Let's look at the main stories that should give you a flavor of where venture capital is at the moment.
Global State of Venture. Panic Edition
Let's start with the latest venture capital overview from CB Insights. What's in it?
Investors closed 6,238 deals worth $58.4 billion in the first quarter, down 21% YoY. This was the eighth consecutive quarter of declining activity. It was only thanks to mega-deals in AI that the situation improved at all.
The US continues to be the VC center. The region accounts for more than half of all investments, $34.2bn. Asia, on the other hand, has narrowed the gap and is almost on par with Europe: $10.2bn and $12.2bn respectively.
The average deal size was $13.8m, while the median deal size was $3m.
Interestingly, the flurry of activity from large corporates and subsequent mega-rounds pulled all the stats. The first quarter is 45% deals over $100 million. I remember mega-rounds being few and far between for a long time, but something has changed.
66% of deals were early stage, while late stage deals only got 9%. Young startups continue to be the focus of investors, and the pattern is staying the same.
The median early-stage deal was $2 million, mid-stage $20 million, and late-stage $24 million.
The authors note an investment surge in digital health and biotech, while retail tech and fintech started to lose ground.
Global State of Venture. Okay Edition
One more overview but this time from European editors. Let’s see what the difference is.
Here the opposite is true. According to their data, investors made only 3200 deals in the first quarter, but for $82.1 billion, an excellent pace. Investment activity is second only to the extraordinary record years of 2021 and 2022.
The early stage remains stable, but there's a pleasant surprise for later-stage startups: investment levels are at their highest since Q3 2022. Now let's look at average deal sizes:
Up to $1m for pre-seed;
$1-4m Seed;
$4-15m Series A;
$15-40m Series B;
$40-100m Series C;
$100m+ everything else.
Enterprise Software, Healthcare, Fintech, Energy, Transportation, and Semiconductors have attracted the most investment.
In terms of specific segments, look at Generative AI, GenAI model makers, semiconductor designers and manufacturers, and oncology.
Sun is rising over Europe
Venture capital investment in Europe is booming, reports PitchBook. Finally, there is a holiday on our continent. In the first quarter, investors closed 2,398 deals worth €16.3 billion, up 19% on the same period last year. Analysts see good momentum and predict an upward trend for the future. At the same time, the number of deals fell slightly, while company valuations remained unchanged. These factors suggest that the quality of companies has improved.
In terms of regions, Northern Europe unexpectedly took the lead, followed by the UK and Ireland, France, and the Benelux. Southern and Central-Eastern Europe traditionally lag. I wonder if Scandinavia will be able to maintain its position.
The study's authors point to the cleantech industry, which attracted more investment in the first quarter than the entire first half of 2023 — an impressive €6.8 billion! This amount even eclipsed AI & ML.
VC funds themselves are doing well in raising capital. In the first quarter, they managed to collect 4.6 billion euros, which is the same level as in 2023, give or take. Analysts remain cautiously optimistic. Interestingly, the best fundraisers in Europe are small funds of up to €250 million.
Clouds over the US
What's not so lucky lately is US venture capital, reports PitchBook. Last year, the number of funds dropped significantly to its lowest level since 2015. The first quarter of 2024 was no exception, continuing the trend: in three months, the US lost 100 VC vehicles worth $9.3 billion.
There are two reasons for the decline. First, US investors' portfolios still feel the negative aftermath of the public market years ago. Second, exit activity is low. Investors do not get enough return on their money and are walking away from venture capital.
As a result of these twists and turns, analysts expect an unprecedented phenomenon: American investors may turn to European counterparts for the first time! It's something you don't see every day. Will they respond? The authors of the study believe they will.
European LPs traditionally have a moderate appetite for venture capital and do not invest much. This is due to well-established diversification norms. However, they may be tempted by American horizons.
Get in Line
There are too many startups in the US and not enough money to go around, say researchers. Today, about 55 thousand VC-backed companies are operating. At the same time, about 2000 VC firms have stopped investing in new projects, and according to the results of 2023, 3200 startups have closed. Bankruptcies in the industry have become so widespread that another industry has sprung up to help startup founders close down.
For example, late-stage companies now need twice as much capital as investors can provide. There is a smaller but still significant shortage of funds for early-stage companies, too. Due diligence has become much stricter, and investors demand companies to reach cash flow break-even as quickly as possible. No clear profit strategy means no investment. Hits everyone.
Conservatism has also affected smaller funds, which have become more cautious even in early-stage deals. Speaking of the latter, investors are feeling increasingly stressed because traction for young companies cannot be calculated before product-market fit. Instead, you have to rely on the team and the individuals, and these are subjective factors.
As a result, the venture capital industry is in a stalemate. On the one hand, mature companies can offer data, but there is not enough money to invest. On the other hand, there is money for early-stage companies, but the risks are daunting.
VC in the Middle East and Northern Africa
Investment in the MENA region fell for the second year but remains historically high. Investors closed 663 deals worth $3.8bn in 2023, down 21% YoY. Look out for Turkey, the UAE, Egypt, and Saudi Arabia. These are the countries that are currently the main hubs in the region.
At last, Investors’ Supremacy is upon us
According to PitchBook, the current investment climate favors investors over startups for the first time in a long while. The trend has changed dramatically since the beginning of 2023. We believe this is due to the infamous era of cheap money coming to a logical end with the pandemic.
This assumption is confirmed by the second chart. Over the same period, the need for capital rose sharply for both early and late-stage companies. The amount of free capital, on the other hand, dropped.
In summary, startups have to work harder to attract investment and take less favorable terms. Investors are no longer throwing money around. At least not yet.
Where do the Top Funds Invest?
One of my favorite columns is which PitchBook tracks the investments of the world's best funds. Here are the highlights.
First, funds continue to scale back their investments. Both the number of deals and the amount of capital invested are falling. For example, compared to the peak in 2022, the declines are 55% and 74% respectively. The number of mega-rounds has also fallen. It seems that large deals are now becoming the prerogative of corporates.
Second, let's look at the industries. In 2023, AI & ML, Web3 & DeFi, Fintech, Enterprise SaaS, Healthtech, Biotech, and Infosec attracted the most investment.
Industrial tech, insurtech, consumer, gaming, legal tech, AR/VR, foodtech, edtech, and proptech received the least attention.
Interestingly, AI dominated the whole of 2023, both in terms of the number of deals and the amount of investment. The authors predict that this trend will continue, as we have yet to see a decline in investor interest.
A few more details from the report. In the AI & ML sector, the average deal size was $40 million, while the average pre-money valuation reached $400 million. The most popular stages are seed and Series A.
Biotech: average deal size $67m, average pre-money valuation $200m.
Web3 & DeFi: average deal size $15M, average pre-money valuation $43M.
Fintech: average deal size $16m, average pre-money valuation $100m.
Emerging Industries for the coming years (maybe)
In the previous section, we looked at the stats on what happened. Now let's look at the future, or in other words, the trends that are gaining momentum. In this section, analysts observe investment in new and emerging technologies that are not on the radar (most of them, anyway).
Again, generative AI is the leader, with the highest number of deals and investment volume. It is followed by AI-powered code completion, electric vehicle platforms, electric vehicle charging infrastructure, and NFTs.
Also look out for next-generation battery technology, auto commerce, commercial space launch, quantum computing, and neurotechnology.
In total, these areas accounted for 3202 deals worth $57.5 billion in 2023. To be honest, I'm surprised to see so many electric vehicles on the list. We have written about this industry before, and it has been in crisis for a long time.
What’s up with pre-seed Startups these days?
Carta has published an analytical review of pre-seed startup valuations, cheque sizes, and other preferences in the US for the first quarter. In ICLUB, we are particularly interested in the early stages, so here are the key findings.
Let's start with the fact that the vast majority of young startups today — around 85% — prefer SAFE to Convertible Notes, which we have an article on. The only exception is the medical device industry. Why that's interesting?
According to Peter Walker, author of the study, startups previously only used SAFE for angel rounds (up to $500,000). Now both young companies and funds have changed the trend and are entering into SAFE up to $3 million. Only after this threshold does a Priced Equity contract come into play.
The authors do not explain the trend or say why it is happening. We have a hypothesis: competition for quality deals is increasing, so investors are agreeing to more comfortable terms for startups. Still, SAFE is a softer kind of deal. By demanding an equity stake here and now, investors can scare off the object of their affection. Now let's look at the other figures in the study.
The typical deal size for pre-seed startups is up to $1 million. The median valuations of the companies are as follows:
$6m if the round is up to $250k;
$8m if the round is up to $500k;
$10m if the round is up to $1m.
The founders offer up to 5, 9, and 14% equity during the fundraising process respectively.
Finally, there is the actual size of the cheques, which ranges from $9 to $25 thousand. No anomalies here.
What Unicorns Perform the Best?
PitchBook has an interesting section tracking the success of unicorn startups. According to the 2023 results, the best performers were companies in the cybersecurity, AI, enterprise SaaS, health tech, e-commerce, fintech, and biopharma industries. The worst performers were mobility tech, supply chain tech, and Agtech.
Useful Data, that can come in handy
Additional overviews of VC in Europe and the US from Dealroom. There are also stats on LatAm, MENA, and South East Asia. Might be useful in case you want to dive even deeper into region-specific reports.
From the Editor
Working on the next interview with the famous CIS-origin investor right now, and even more tech developments for the coming year. Should be in your inbox starting next week, so stay in touch. In Kyiv, spring is in full swing and everything is blooming. If only I could say that for VC (just kidding, I love it). Or maybe I simply can’t escape it?
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