E141: State of Series A's, VC dry powder, IPO window opens + more with Bill Gurley & Brad Gerstner
Aug 11, 2023
auto_awesome
Join Bill Gurley, a partner at Benchmark, known for his deep expertise in tech investments, and Brad Gerstner, CEO of Altimeter Capital, as they dissect the current state of Series A funding and the challenges unicorns face in navigating the IPO landscape. They delve into the implications of venture capital dry powder and cyclical market dynamics, shedding light on the recent trends in startup valuations. The discussion also addresses the urgent climate crisis reflected in the Maui wildfires, blending insightful analysis with urgent global issues.
Series A funding rounds have seen a decrease in median round size and pre-money valuations, but AI-focused companies are experiencing a surge in activity and larger funding rounds.
LPs are facing challenges in liquidity management, leading to reductions in commitments to venture funds and less capital available for deployment.
The IPO window may be opening with companies like Instacart, Stripe, and Reddit considering public listings, but complexities arise from unicorn companies' cap tables and valuation expectations.
M&A activity faces challenges due to regulatory actions and increased scrutiny, making IPOs and recapitalizations more attractive options for companies seeking liquidity and simplicity in their capital structures.
Deep dives
Series A funding and market trends
Series A funding rounds have seen a decrease in median round size, with $7 million raised, down 26% from the previous year. Pre-money valuations have also decreased, down 17% to $40 million. However, AI-focused companies are experiencing a surge in activity and larger funding rounds. It is important to note that while there is dry powder available, VC firms do not have direct access to that capital as it is held by LPs. LPs face their own challenges, including the need to meet liquidity requirements, which impacts the amount of capital available for future funds.
LP-GP dynamics and the impact on capital deployment
LPs are facing challenges in liquidity management, with reductions in commitments to venture funds. This reduction in commitments trickles down to smaller funds and less capital available for deployment. Additionally, the capital cycle faces a potential decrease in available funds due to LPs' liquidity issues. This, combined with larger VC firms and younger partners seeking successful deals to build a track record, may lead to increased competition in larger growth-stage deals.
Opening IPO window and complexities of unicorn valuations
The IPO window may be crackling open, with companies like Instacart, Stripe, and Reddit considering public listings. Complexities arise from unicorn companies' cap tables, diverse liquidity preferences, and worries about reaching valuation expectations. IPOs can offer a cleaner pathway for liquidity and simplification of cap tables. However, the complexity of late-stage unicorn deals and the potential erosion of liquidation preferences could push companies towards the public markets to clean up their cap tables.
M&A challenges and potential alternatives
M&A activity faces challenges due to regulatory actions and increased scrutiny. Lena Khan's appointment as the FTC chair has brought increased focus on antitrust issues, which may impact merger approvals. This intensifies the complexity surrounding unicorn valuations and exacerbates the difficulty of completing M&A transactions. Consequently, IPOs and recapitalizations may become more attractive options for companies seeking liquidity and simplicity in their capital structures.
Impact of IPO market pressure on companies
The lack of an M&A market and pressure on companies to raise capital is leading to an increase in IPOs. However, not all IPOs are of high-quality, with many SPACs and lower-quality offerings inflating the numbers. This pressure for liquidity is forcing companies to go public, even if it means participating in down-round IPOs.
Down-round IPOs and their impact on investors
In the current market, high-quality companies that go public often face down-round IPOs where their valuations are significantly lower than their private rounds. This impacts investors who have preferred shares as their preference is washed and they experience a significant decline in the value of their investment. These down-round IPOs aim to reset valuations and clean up the company's capital structure.
The future of IPOs and the need for public markets
Despite the challenges posed by down-round IPOs, there is still a need for companies to go public. It is seen as a healthy move for high-revenue companies to enter the public markets and continue to innovate and grow with the discipline and cadence of the public markets. It is expected that IPO activity will increase gradually, with a higher number of IPOs in the coming quarters.
