Essays of the Week

• Down Markets and Liquidity
• Growth in Secondary Markets
• Private Equity as a Buyer
• Valuations of Unicorns
• The Bid/Ask Spread in Venture Capital
• A16z Closes Its Headquarters
• Organizations Powered by AI
• Brad Feld Discusses Matt Levine

News Week

• FirstMark Secures $1 Billion in New Funds
• Amazon Acquires One Medical
• Tesla Liquidates 75% of Bitcoin Holdings
• Stripe Reduces Valuation

Startup of the Week

• Crunchbase

Tweet of the Week

• Long Hot Indian Summers

Editorial

This week, while public markets experienced gains, my focus shifted toward the dynamics of private equity and venture funding, especially considering the prevailing market downturn. It's often said that private markets tend to lag behind public market corrections.

Jason Lemkin’s article on liquidity highlights an essential yet often overlooked aspect of venture capital. Many funds report Total Value to Paid-In (TVPI), which reflects the perceived value of their portfolios based on private valuations, while Distributions to Paid-In (DPI) show the actual cash returned to investors. In the early stages of a fund, DPI is usually under 1, as significant exits are rare and typically occur several years post-investment. Liquidity in venture capital mainly arises through three avenues: company acquisitions, IPOs, or secondary market sales. The first two options are predominant, but secondary sales are on the rise.

However, it might not be prudent for early-stage venture investors to fixate on liquidity. A slowdown in liquidity won't significantly impact outcomes unless it persists for an extended period. For instance, Amazon's acquisition of One Medical suggests that public market corrections may even enhance exit opportunities. Additionally, Tomasz Tunguz’s contributions in this week's essays underscore the role of private equity firms as acquirers of venture-backed companies.

Lemkin also shifts focus to founder liquidity, a distinct concept from overall venture liquidity. While secondary markets for shares are expanding as institutional investors acquire positions, the market for employees selling shares seems to be contracting.

From my personal experience, I've never sold shares in any of my startups prior to an IPO and have no intention to do so. The existence of platforms like Forge Global indicates some founders and employees do engage in share sales, although buyer interest may wane as prices drop.

The articles compiled below examine various aspects of declining markets, but it's crucial to recognize that "down" is a relative term.

At SignalRank, we monitor live data related to the GPRank 100, representing leading seed and Series A investors. Recent data reveals some shifts over the past year.

The data, sourced from Crunchbase (our featured startup this week following its $50 million Series D raise), tracks 12 months of Series A investments made by GPRank 100 investors in companies that have yet to secure Series B funding. The data reveals a stable cadence in funding rounds, with June showing particularly strong activity.

The second chart illustrates the median amount raised in Series A rounds, which consistently hovers around the $20 million mark.

Additionally, we track Series B rounds involving GPRank 100 investors.

The median raise for a high-quality Series B has seen a slight decrease through May but rebounded in June, currently averaging around $60 million.

Overall, the ecosystem for top-tier seed, Series A, and Series B rounds remains robust, likely benefiting from lower valuations in response to public market fluctuations. Tomasz Tunguz’s second article discusses the bid-ask spread between investors and founders, which is worth reading as it influences investor interest in potential acquisitions and fundraises. Notably, FirstMark announced a $1 billion fundraising this week.

Now is not the time to dwell on market downturns; it's a moment for founders to execute their visions and for early-stage investors to deploy capital. Understanding market reactions, however, remains vital. Enjoy the articles below.

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Essays of the Week

Down Markets and the Evaporation of Liquidity Jason Lemkin

By now, SaaS founders should be aware that public market valuations have plummeted by approximately 50% since their peak in 2021. This trend is particularly frustrating given that revenue growth remains robust, with leading SaaS companies exceeding $1 billion in annual recurring revenue (ARR). Despite their growth, these companies now carry valuations that are roughly half what they were just months ago.

As this valuation downturn extends over several months, a new set of challenges is emerging. It's not just that notable firms like Snowflake, Datadog, and Zoom have seen their valuations cut in half; this decline will inevitably impact venture valuations in the long term.

An even more significant concern may revolve around liquidity.

When markets are thriving, there is a rush toward illiquid assets like startups, and investors rarely worry about cashing out. Their focus is primarily on getting capital in, often with the assumption that they can easily withdraw their investments later.

• The liquidity for secondary sales by founders is becoming increasingly scarce and smaller in volume. In the heated market of 2021, many SaaS founders could liquidate millions in shares even during Series A rounds, but the landscape has cooled considerably. Top-performing B2B founders previously extracted tens of millions through secondary sales; such occurrences relied on high demand for shares. With overall demand waning, accessing substantial secondary liquidity for founders is becoming increasingly difficult.
• The IPO market is largely stagnant. While companies with impressive growth can still go public, many are facing a challenging environment. Notably, the valuations for most are now likely half or less than what they were a year ago, even for high performers in SaaS.
• Mergers and acquisitions (M&A) have also seen a significant decline. While one might expect that lower asset prices would spur acquisitions, the reality is different. Many potential acquirers are grappling with their own declining stock prices, complicating acquisition costs. Furthermore, top-tier assets are less likely to sell at steep discounts, leading to a cautious approach in a down market.

The article "Down Markets and the Evaporation of Liquidity" can be found on SaaStr.

Secondaries Market Poised for Growth Amid European VC Challenges The European venture secondaries market is set for significant expansion due to a lack of appealing exit strategies, which has heightened the demand for liquidity.

Increased volatility in tech companies' public markets has drastically reduced interest in exits for VC-backed firms in Europe. According to PitchBook, as of June 15, only 463 deals, worth a total of €16.9 billion (approximately $16.96 million), were completed this year—a stark decline of 61.4% in deal count and 87.6% in total value compared to 2021.

As investors brace for a challenging exit landscape, Europe’s developing secondaries market is heating up, with startup investors and limited partners eager to liquidate some assets. Dany Bidar from Octopus Ventures notes that current market conditions, marked by rising interest rates and a shift away from high-growth stocks, are leading to a liquidity crunch in the venture capital sector.

Global venture secondaries volume is projected to reach $138 billion by 2023, as per Industry Ventures data. However, Europe has been slower to engage in these transactions, partly due to a smaller primary market and the complexities associated with venture secondary deals. Various European jurisdictions impose restrictions on share transfers, complicating these transactions.

Private Equity's Role in Venture Capital in 2022 In 2018, Jason Lemkin and I discussed how private equity is becoming a more aggressive buyer of venture-backed software companies. Last year saw private equity firms acquire startups worth a record $29 billion—a 50% increase from the previous high.

This milestone highlights the growing importance of private equity as an exit strategy for startups. In 2021, private equity buyouts accounted for over 20% of venture-backed M&A by value, doubling over the last decade. Transactions involving startups acquired by private equity funds have median sale prices comparable to strategic M&A.

Private equity firms typically target SaaS/IaaS companies with at least $20 million in ARR, solid unit economics, and annual growth rates between 10-30%. They also look for impressive gross and net dollar retention metrics, with net income close to profitability.

Klarna's Decline Raises Questions About Unicorn Valuations In Q2 of 2022, 32 companies joined the Crunchbase Unicorn Board, contributing an additional $49 billion in value and $7.7 billion in funding.

The Bid/Ask Spread in Venture Capital The bid/ask spread in venture capital is the difference between the post-money valuation offered by a VC (the bidder) and the price at which a company is willing to sell (the seller).

In previous years, this spread was narrow, reflecting a liquid market where startups could attract buyers at favorable prices. However, today, the bid/ask spread can extend into the tens or hundreds of millions, depending on the company's stage.

A startup that received verbal offers of $500 million in Q1 may now anticipate a raise closer to $450 million, reflecting a 10% adjustment. However, market comparables suggest a valuation discount of 50%, placing the potential trading value at $250 million and widening the spread to $200 million, illustrating a significant gap.

a16z's Transition to a Cloud-Based Model Since its establishment in 2009, Andreessen Horowitz has been rooted in Silicon Valley, leveraging the area's rich network effect. However, the COVID-19 pandemic has prompted many tech companies to adapt to remote work, revealing that this model can be effective.

As a result, nearly all tech firms have adopted remote or hybrid work structures, diminishing the significance of the Silicon Valley network effect. This shift is beneficial for the broader entrepreneurial ecosystem, allowing talent from various regions to contribute without relocating.

Moving forward, Andreessen Horowitz will primarily operate virtually while utilizing physical presence to foster culture, support entrepreneurs, and build relationships.

Building an AI-Powered Organization Dr. Babak Hodjat, a serial entrepreneur and former chief architect of Siri, argues that insights alone are not sufficient for companies. In his past keynote address at ODSC East, he outlined the challenges organizations face and how they can evolve into truly AI-powered entities.

Companies often seek AI for predictive capabilities—like identifying fraudulent transactions—but the analytics provided merely inform decision-making rather than drive it. The complexity of these analytics often leads to confusion and misinterpretation.

Dr. Hodjat emphasizes that AI should aid in decision-making rather than serving solely as an analytics tool. He contends that companies need to rethink their approach to becoming genuinely AI-driven.

The Brilliance of Matt Levine Among business and technology writers, Matt Levine stands out as a must-read. His insightful commentary is a staple for many, as he continues to engage readers with his unique perspectives.

News Week

FirstMark Announces $1B in New Funds FirstMark Capital recently announced the launch of over $1 billion in new funds, a significant milestone for a firm established in 2008 when New York's venture capital landscape was still emerging.

Amazon Acquires One Medical for Approximately $3.9 Billion Amazon has confirmed its acquisition of One Medical, a primary healthcare provider, for around $3.9 billion. The deal is anticipated to transform the healthcare experience, according to Amazon executives.

Tesla Sells 75% of Bitcoin Holdings Amid Profit Decline Elon Musk revealed that Tesla sold 75% of its bitcoin holdings to strengthen its cash position, coinciding with a notable drop in profits due to production challenges.

Stripe Lowers Internal Valuation Payments processor Stripe has reportedly reduced its internal share valuation by 28%, reflecting broader market trends impacting tech companies.

Startup of the Week

Celebrating Crunchbase’s $50 Million Series D Crunchbase has successfully completed a $50 million Series D round, acknowledging its potential in the account-based prospecting sector.